Answer Happy

Atempts Average 14 6. Valing the growth option with the lack Scholes option pricing model Real option analysis can be used to alter the ting, scale, or other aspects of an investment in response to mare continues the dilema of whether to invest in a project or abandon it if it does not a value to the form options in financial managerstone the front conces of the flexibility and the value of the option Fat Sheep Hede Company, a social networking company has seen triple-digit growthis websites over the past two years. Most of the wester's subscribers live outside the United States, and the company regrase in the member of users from Brant. As a result, Fat Shoep is considering opening a martorting office in Bras to expande mwing efforts there Management, however is not sure if the brain expansion via the opening of a subsidiary office will help the company grow and increase its value. Management uncertainty is the rest of the possible that Brants internet connectivity will be inutit to support all of sheep's forecasted growth One of a Shop erdoyees, Natalia, who is originally from Brazil, conducted alle pretmay make remote following details about the potential five-year projed: • Opening the new marketing office will require an initial investment of $6.00 min • According to research on tant's mobile technology infrastructure, Natalia noted there a probability that the country's mobile connectivity will be suficient to generate additional trung cash rows of $9.00 per year for the company for the next live wars
• Opening the new marketing office in Brazil will require an initial investment of $6.00 million • According to research on Bran mobile technology infrastructure, Natalia noted there is a 60% probability that the country's mobile connectivity will be sution to generate additional advertising cash flows of $9.00 milion per year for the company for the next five • Alternatively, there is a 40% chance that mobile Internet connectivity will be insuficient to portrait Sheep's desired growth in Brazil. In this case, the company expects to generate additional net advertising related annual cash flows of only $3.00 million for the best five years • The project expected cost of capitals 14.00, and the risk free rate is 44. The project's WACC should be used to discount cash flows (Note: Given this information, the projects expected net present value (NPV) without the consideration of the growth options Round calculation to two decimal places) Alter further researth, Natalia added a few more details to her proposal Incomet connective is good, then at the end of Year 3, Fat Sheep should consider investing $4.50 ton to purchase ng Banho marketing firm and is a new stary
After further research, Natalia added a few more details to her proposal • Il brasil's Internet connectivity is good, then at the end of Yen 3. Fat Sheep should consider investing $4.50 million to purchase an Stig Brazilian marketing firm and creating a new subsidiary • The new subdary is expected to generate $1.60 million of additional annual cash flows in years and years . However, if the Internet connectivity in Brazil inadequate to support Fat Sheep's desired customs growth, then the company wil not invest the additional funds in year or earn the expected additional vertising-related cash flows Based on taas at information, use the decisions tree analysis to calculate the new of the project including the growth option. The calculate the value of the growth option by itself and select the correct answers from the choses av the Row table Newbe to use the broject's cost of cow to discount arcushows. (Note: Round all answer to two decades.) Valur NPV of the project with growth option Browth option value Lastly, Nataka wants to see the Black Scholes option pricing model (OPM) to determine the value of the growth option to do this, we collected and computed the values for several additional variables, and has given you the lack Scholen OPM equation for the valuation of an option VI
Lastly, Natalia wants to use the the Blade Scholes option pricing made (OPM) to determine the value of the growth option to do the the has collected and computed the values for event witional variables, and has given you the Blade Scholes Motion for the ton of an option (V) V-(PxN())-(Xxx N (d)). where the current of a proxy price of the value of the underlying asset (which is the present of the delayed projects forecasted future cash flows N (d) and N (d) = states of the variance of the project's expected retum x the option's strike price, which is the cost of purchasing the train tim that will become the Fat Sheep's story the mathematical constant equal to 2.71828825459045235360.... which can be truncated and rounded to 2.7160 the markets isk-free rate to the time until the option experes, w, in this situation, sumed to be the end of third year, when the potential purchase of the subsidiary would take place According to tak, these variables should assume the following values
the ophon's strike prion, which is the cost of purchasing the Brazilian firm that will become the fout Sheep's subsidiary - the mathematical constant equal to 2.718201628459045236.360....which can be truncated and rounded to 2.7183 the market's free rate the time until the option expires, which, in this situation is assumed to be the end of third yes, when the potential purchase of the subsidiary would take place According to Natalia, these variables should assume the following values Value 14.00 0.7573 Variable Project cost of capital Current value of the delayed investment (P) N[d), acestiated by Natalia N(), as stated by Natalia Delayed investment's strike price (X) Mathematica constante Risk free rate) Thine until the option expires (1) 0.7082 2.7183 0.04 (Note: Round Given these values, the estimated value of Fat Sheeps growth option using the Black Scholes OPM (V) is calculations to two decimal places)