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

Personal representatives powers Personal representation shall have the following powers: 1) To enforce for the deceased's estate by suit or otherwise all causes of action that

Illustration: Computation of retained profits acquisition Normal 0 false false false EN-US X-NONE X-NONE MicrosoftIn

Equitable apportionments There are five leading cases where the courts have laid down rules to meet specific situations in which there is a conflict of interest between life tena

Dissolutions situations There are two situations that need to be considered under dissolutions. These are:- 1) Where the assets are sold at once (one single transaction) 2) As

The non current asset section of Aadil & Co. at December 31, 2005 is as under:- Land Rs. 1,000,000 Office equipment Rs. 5,000,000 Less: accumulated depreciation 250,000 4,75

APPLICATION FOR GRANT 1) An application for a grant of representation ("representation" means the probate of a will or the grant of letters of administration) is made in such a

Illustration of Retirement of a partner A, B and C have been trading as equal partners having capital contributions of £500,000 and £400,000 and £300,000 respectively as at 1st

Terry Corporation had 300,000 shares of common stock outstanding at December 31, 2010. In addition, it had 90,000 stock options outstanding, which had been granted to certain execu

Conditions of a will A written will is not valid unless it fulfills the following conditions. 1) The testator must sign the will; or he must affix his mark to the will (i.e. a