The Main Difference Between Applying Real Option Theory to Real

question 9

Multiple Choice

The main difference between applying real option theory to real estate development and applying it to many typical industrial corporate capital budgeting problems is that:

• A) The typical industrial corporation is a publicly traded firm whose stock price rapidly reflects the investment value of the firm.
• B) The typical industrial capital budgeting question faces a "use it or lose it" finite window of opportunity for the investment.
• C) There is usually a reasonably well functioning market in real estate for the development option in the land market), which allows the opportunity cost of the option exercise to be easily quantified in the NPV calculation.
• D) In the typical industrial corporation only the market value of the investment decision can be estimated, not the investment value, which makes it necessary to wait for an NPV substantially greater than zero.

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Definitions:

Due Diligence Defense

A defense in which the defendant argues that he or she applied the appropriate degree of attention, care, and research expected of a party in a given situation and had reasonable grounds to believe that certain facts and statements were accurate and had no omission of material facts.

Securities Act

refers to a set of regulations enacted by the United States Congress in 1933 to govern the sale of securities to the public, primarily aimed at ensuring transparency and fairness in the investment market.

Department of Justice

A federal executive department responsible for enforcing the laws of the United States, headed by the Attorney General.

Insider Trading

Illegal buying or selling of a corporation’s securities by corporate insiders, such as officers and directors, on the basis of material, nonpublic information and in breach of a fiduciary duty or some other relationship of trust and confidence.