Draw the event and decision tree, Financial Accounting

Suppose Real Option Inc. has a product that generates the following cash flow.

At t=1, the demand can be high or low with equal probability. If demand is high (low) the cash flow is CFH=400 (CFL=200).

At t=2, the demand can also be high or low. If demand was high at t=1, then a high demand at

t=2 arises with probability 0.8. If demand was low at t=1, then a high demand at t=2 arises with probability 0.2. If demand is high (low) at t=2 then CFH=400 (CFL=200). The (risk adjusted) interest rate for this project is 10%.

(a) Draw the event and decision tree.

(b) What is the market price (expected value) of Real Option Inc. at t=0?

Now suppose Real Option Inc. can rent a platform to run a marketing campaign. For this purpose Real Option Inc. must sign a two year contract with the platform provider. The costs for using the platform are 200 per period. Marketing itself does not cost anything and has the following effect. In the high demand state, marketing doubles the demand. In the low demand state it has no effect.

(c) Should Real Option Inc. rent the platform at t=0 and run the marketing campaign?

Contracts can only be signed at t=0. But suppose Real Option Inc. can terminate the contract after the first year by paying a fine of 10.

(d) What is the optimal strategy of Real Option Inc. and the maximum market value of the firm?

 

Posted Date: 3/29/2013 5:31:37 AM | Location : United States







Related Discussions:- Draw the event and decision tree, Assignment Help, Ask Question on Draw the event and decision tree, Get Answer, Expert's Help, Draw the event and decision tree Discussions

Write discussion on Draw the event and decision tree
Your posts are moderated
Related Questions
assignment ofr p V RATIO ANALYSIS

The company pays its employees at the end of the day Friday for work done during that five-day work-week. Total wages for a week are $16,000. In the current year, December 31 occur

Purchases office supplies on account costing $12,600 during July. It pays $5,500 for these purchases during July and the remainder during August. Office supplies on hand on July 1

Lockheed Martin's management wishes to find out whether they have excess debt capacity. Its current market value of equity is $40 b and its book value of debt is $

The intestate leaves no spouse but children The net estate devolves upon the surviving children and is divided equally between them. If any child has not, at the time of intest


Q. Stock dividends and stock splits have the following effects on retained earnings: Stock Splits Stock Dividends a. Increase No change b. No change Decrease c. Decrease Decrease d

The standard EOQ model supposes that materials can be procured immediately and thus implies that the firm may place an order for replenishment as the inventory level drops to zero.

How to prepare a bond amortization sheet

Sheridon Corporation is investigating automating a process by purchasing a new machine for $515,000 that would have a 10 year useful life and no salvage value. By automating the pr