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

question 1

Multiple Choice

A firm has a three-year real option to invest in a project that has a present value of $500 million with an exercise price (in year 3) of $800 million.Calculate the value of the option given that N(d1) = 0.3 and N(d2) = 0.15.Assume that the risk-free interest rate is 6 percent per year.

• A)$30 million
• B)$49.25 million
• C)zero
• D)$7.08 million

---

Definitions:

Equity Method

An accounting technique used to record an investor's earnings in proportion to their ownership stake in a company.

Periodic Net Income

Periodic net income refers to the total earnings of a company, after accounting for all expenses and taxes, over a specific financial reporting period.

Brokerage Fees

Charges that are paid to a broker for executing transactions or providing specialized services.

Common Stock

A form of corporate equity ownership, a type of security that represents ownership in a corporation and gives holders voting rights and a share in the company's profits through dividends.