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9 Cards in this Set
- Front
- Back
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What are threecaseswheretheoptiontodelaycan makeadifferencewhenvaluingafirm? |
-Undeveloped land in the hands of the company, when to develop it? -A firm that owns a patent, do we produce the patented product? -A naturalresourcecompanythathasundeveloped reservesthatitcanchoosetodevelopatatimeofits choosing—presumablywhenthepriceoftheresource ishigh |
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What is PV= V - X? |
V is the pv of cashflows of an investment while X is the initial investment.
So if V is higher than X, you should invest in the project. |
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How do you estimate the variance in the value of the asset? |
1. Use the variance from past 2. use probabilities to estimate cash flows (Most popular but not always accurate) 3. Use the variance of firms involved in the same business. Example of the variance of firms involved in same business would be to find the variance of a product and not the whole firm. The cholesterol pill is an example of comparing the generic one to the popular one. |
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What is the cost to delay? |
When the NPV of your project turns positive, firms will exercise their american options. There is a cost to delaying a project once the NPV turns positive, if you wait the additional period you might gain the variance which would bring up the value but can also lose against because of competitors. |
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How to estimate the cost of delay? |
1/n n is the number of years Usually the cost to delay translates into one less year to create revenue example of new technology It gets cheaper the next year (New 4k TV) |
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ImplicationsandExtensionsofDelay Options? |
Even with a negative NPV there might still be value because of the option. If its a positive NPV, Afirmismorelikelytowaitifithas: –therightstotheprojectforalongtime –protectionagainstcompetition –thevarianceinprojectinflowsishigh Even with a static less attractive analysis, increasing the uncertainty may devalue the option. Asanoption,anincreaseintheuncertaintymayactuallymaketheoptionmorevaluable |
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How to value a patent? |
The patent can viewed as a call options where the product is the underlying asset? |
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What are competitive pressure and option values? What are the implications for the value of patent as an options? |
–thelifeoftheoptionwillnolongerbethelifeofthe patent,buttheleadtimethatthefirmbelievesithas untilacompetingproductisdeveloped –Thiswillreducethevalueoftheoptionandmakeit morelikelythatthedrugwillbecommercially developedearlierratherthanlater. |
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Go through slides slides |
Not very informative |
