Multiple Choice
Identify the
letter of the choice that best completes the statement or answers the question.
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1.
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A
real option can be defined as: a. | An option in a commodity such as tin or
coffee | c. | An option on the
future cash flows arising from an investment decision | b. | An option
security traded on a recognised derivatives exchange | d. | An option on the real assets of the
firm | | | | |
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2.
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Which
is the more appropriate way of completing the following sentence? The more volatile the
expected cash flows of an investment project….. a. | The higher its
net present value and the higher its real option value | c. | The lower its net present value and the lower its real option
value | b. | The lower its net present value but the higher its real option
value | d. | The higher its
net present value and the lower its real option value | | | | |
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3.
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Generally the exercise price of a real option is: a. | The capital
expenditure involved | c. | The cost of
winding up the existing project | b. | The present value of the cash flows of the
project | d. | The net present
value of the project | | | | |
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4.
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f the
only volatility estimate you can find is that of the company's equity at 20 per cent per annum and
the firm's operating and financial gearing are 30 per cent and 40 per cent respectively then the
volatility of its underlying cash flows is: a. | 20 per cent | c. | 15 per cent | b. | 166.67 per
cent | d. | 47.62 per
cent | | | | |
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5.
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The
net present value of an investment project is £6million and the anticipated capital expenditure
is £35 million. The volatility of the project's underlying cash flows is 35 per cent and
the risk free rate is 5 per cent. The company can, at its option delay the implementation of
the project for 12 months only. What is the value of the option to delay? a. | zero | c. | £9.89
million | b. | £3.38 million | d. | 35.29 million | | | | |
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