# Quiz 14: Real Options

Business

Q 1Q 1

When answering the questions below, refer to the following table and related data.
Project Cash Flow Tree From a New Project
Effective annual risk free rate = 4.5% Expected market return = 10%
Cash flow beta = 1.4
The true probability of the high cash flow in a given period is 52.0%.
-What is the risk neutral probability of an upward movement in the project cash flows during the first year of operations?
A) 35.6%
B) 40.3%
C) 48.1%
D) 59.7%

Free

Multiple Choice

B

Q 2Q 2

When answering the questions below, refer to the following table and related data.
Project Cash Flow Tree From a New Project
Effective annual risk free rate = 4.5% Expected market return = 10%
Cash flow beta = 1.4
The true probability of the high cash flow in a given period is 52.0%.
-What is the risk neutral probability of the first two years of the project cash flows moving down?
A) 40.3%
B) 48.0%
C) 52.0%
D) 59.7%

Free

Multiple Choice

A

Q 3Q 3

If the project has an $80 annual cost requirement, what is the first year risk neutral expected cash flow?
A) $93.99
B) $87.54
C) $13.99
D) $7.54

Free

Multiple Choice

D

Q 4Q 4

If we continue to consider the $80 annual cost, but are able to avoid operating in years where money will be lost, what is the expected risk neutral cash flow in year 2?
A) $2.12
B) $14.36
C) $80.00
D) $82.12

Free

Multiple Choice

Q 5Q 5

What is the value of the project if the true probabilities are used and the appropriate one period risk adjusted discount rate is used (assume the $80 annual cost does not exist)?
A) $169.65
B) $201.42
C) $233.73
D) $288.64

Free

Multiple Choice

Q 6Q 6

What is the value of the project assuming an $80 annual cost?
A) $10.86
B) $13.81
C) $33.52
D) $47.33

Free

Multiple Choice

Q 7Q 7

What is the value of the project assuming an $80 annual cost and the option of not pursing the project in periods where cash flow is negative?
A) $10.86
B) $13.81
C) $33.52
D) $47.33

Free

Multiple Choice

Q 8Q 8

Given the requirement of an $80 annual cost, what is the value of the option to abandon the project in periods where the cash flows are negative?
A) $10.86
B) $13.81
C) $33.52
D) $47.33

Free

Multiple Choice

Q 9Q 9

Given the requirement of an $80 annual expenditure, what is the elasticity of the cash flows in period 1, with respect to the scenario in which no investment is required?
A) 1.40
B) 7.08
C) 9.68
D) 11.62

Free

Multiple Choice

Q 10Q 10

What is another term used to describe the forward price?
A) Certainty equivalent
B) Elasticity
C) Risk neutral price
D) Value

Free

Multiple Choice

Q 11Q 11

The phrase in real option theory used to replace the strike price?
A) Exercise
B) Investment
C) PV of asset
D) Trend

Free

Multiple Choice

Q 12Q 12

Mead, Inc. may invest $20 million in a new fiber optic project. Due to market conditions, annual production costs and revenues are forecasted at $10 million and $8 million, respectively, starting next year. Revenues are expected to grow at 4.0% and interest rates are 6.0%. What is the change in value if the project is commenced in 5 years instead of today? (Use static analysis.)
A) $8.84 million
B) $10.84 million
C) $12.84 million
D) $14.84 million

Free

Multiple Choice

Q 13Q 13

Techie, Inc. may invest $5 million in a new Star Communicator project. Annual production costs and revenues are projected to be $2 million and $1.5 million, with each growing at 2.0% and 4.0%, respectively. At an interest rate of 5.5%, what is the approximate investment year that will maximize value? (Use static analysis.)
A) Year 20
B) Year 15
C) Year 10
D) Year 5

Free

Multiple Choice

Q 14Q 14

Use a binomial tree to value the following option. Assume r

_{f }= 0.04, r_{p }=0.12, σ = 0.35, E(CF_{1}) = $30, and cost = $300. What is the value of this project option? A) $40.74 B) $50.60 C) $55.32 D) $62.12Free

Multiple Choice

Q 15Q 15

Use a binomial tree to value to following option. Assume r

_{f }= 0.045, r_{p }= 0.14, σ = 0.20, E(CF_{1}) = $62 million, g = 0.03, time horizon = 2 years, binomial period = 1 year, and cost = $500 million. What is the value of this project option? A) $47 million B) $57 million C) $67 million D) $77 millionFree

Multiple Choice

Q 16Q 16

The current price of gold is $310.00 per ounce. The effective lease rate and risk free rate are 1.0% and 3.5%, respectively. If the cost to mine one ounce of gold is a constant $250, what is the value of an option to wait and mine the gold later?
A) $135
B) $145
C) $155
D) $165

Free

Multiple Choice

Q 17Q 17

The price of oil is $22 per barrel. The effective lease rate and risk free rate are 5.0% and 6.0%, respectively. The constant cost of extraction is $18 per barrel and the volatility of prices is 18.0%. What is the value of an option to defer extraction?
A) $5.34
B) $6.34
C) $7.34
D) $8.34

Free

Multiple Choice

Q 18Q 18

The price of oil is $45 per barrel. The effective lease rate and risk free rate are 3.0% and 4.0%, respectively. The constant cost of extraction is $25 per barrel and the volatility of prices is 15.0%. If an untapped well costs $240 to open and can produce indefinitely, what is the value of the unopened well?
A) $424
B) $554
C) $635
D) $785

Free

Multiple Choice

Q 19Q 19

The price of oil is $45 per barrel. The effective lease rate and risk free rate are 3.0% and 4.0%, respectively. The constant cost of extraction is $25 per barrel and the volatility of prices is 15.0%. If an untapped well costs $240 to open and can produce indefinitely, at what price per barrel should the well be opened?
A) $34
B) $44
C) $54
D) $64

Free

Multiple Choice

Q 20Q 20

An existing well is operating and the price of oil is $45 per barrel. The effective lease rate and risk free rate are 3.0% and 4.0%, respectively. The constant cost of extraction is $25 per barrel and the volatility of prices is 15.0%. If it costs nothing to shut down the well, at what price would we close the well?
A) $12
B) $25
C) $37
D) $49

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Multiple Choice

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Essay

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Essay

Q 24Q 24

In the context of peak-load energy generation and a European exchange option, what is the spark spread?

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Essay

Q 25Q 25

What feature of the abandonment option makes the use binomial pricing more appealing than the Black Scholes pricing model?

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Essay