A Firm Has a Two-Year Real Option to Invest in a Project

question 35

Multiple Choice

A firm has a two-year real option to invest in a project that has a present value of $400 million with an exercise price (in year 2) of $600 million.Calculate the value of the option given that N(d₁) = 0.6 and N(d₂) = 0.4.Assume that the risk-free interest rate is 6% per year.

• A)$26.4 million
• B)zero
• C)$239.59 million
• D)$13.58 million

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Definitions:

Dividend Yield

A metric illustrating the annual dividends paid by a firm as a proportion of its share price, typically represented as a percentage.

Equilibrium

A state in which market supply and demand balance each other, and as a result, prices become stable.

Preferred Stockholders

Investors who own shares that typically do not have voting rights but have a higher claim on assets and earnings than common stockholders, such as receiving dividends before them.

Liquidation Proceeds

The funds that are received as a result of liquidating, or selling off, a company's assets, typically occurring during bankruptcy or when a company closes.