...Deloitte case sooner or later is issuing stock options to employees in order to align their compensation with the performance of the company. Thus, management believe that this options only be vested if revenue for the company is greater than $10 million for following three years. According to article we assume that we have already vested, the fair value does not change during the life of the award unless we modified the term. If company able to measure compensation cost at $6 grant date fair value only when revenue factor was fulfill. However, whether or not the $6 is based on the fair value of the employee’s share. Accordingly, we believe that the arrangement in the question must be accounted as compensation under ASC 718. Even If the performance compensation based has not met, the award price relatively stays stable. As long as the employee meet the fair value measurement. The company recognize the compensation cost on the grant date, which is when the employee performer the service. Soon or later should use fair value $6 at grant date. According to ASC, 178-10-30-6, “the measurement objective for equity instruments awarded to employees is to estimate the fair value at the grant date of the equity instruments that the entity is obligated to issue when employees have rendered the requisite service and satisfied any other conditions necessary to earn the right to benefit from the instruments (for example, to exercise share options). That estimate is based on the share price...
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...STEP 1: Picture the problem When it comes to visualizing real options, we are really trying to visualize how the flexibility to alter an investment’s scale, scope, and timing enhances the value of an investment. In effect, visualizing the real options involves trying to look into the future and imagining how the project at hand might be altered to increase its value. STEP 2: Decide on a solution strategy Real options arise out of flexibility or opportunities to do different things with an investment over its useful life. So we need to look for the opportunities presented to Imperial Properties in the two properties. STEP 3: Solve The primary option presented to Imperial in this situation is the option to develop the properties and change them from two 4-apartment units to two luxury 10-apartment units. However, to exercise this option Imperial must commit to a $1.5 million building program for each building. Moreover, we are left with the impression that Imperial holds the option to develop one or both buildings. This suggests that if the firm undertakes one of the building projects it can defer the second until it sees how the first proceeds. STEP 4: Analyze Options add value to projects and generally indicate that static NPV calculations will underestimate the value of the investment opportunity. This results from the fact that where managers have the flexibility (options) to respond to changing economic conditions, they can modify or halt the operation of the...
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...Second Order Moment Approach to Real Options Analysis Submitted as a Component of Required Courses for the Award of Bachelor of Engineering (Civil) Honours School of Civil Engineering University of New South Wales Author: Ariel Hersh October 2010 Supervisor: Professor David G. Carmichael i ORIGINALITY STATEMENT ‘I hereby declare that this submission is my own work and to the best of my knowledge it contains no materials previously published or written by another person, or substantial proportions of material which have been accepted for the award of any other degree or diploma at UNSW or any other educational institution, except where due acknowledgement is made in the thesis. Any contribution made to the research by others, with whom I have worked at UNSW or elsewhere, is explicitly acknowledged in the thesis. I also declare that the intellectual content of this thesis is the product of my own work, except to the extent that assistance from others in the project's design and conception or in style, presentation and linguistic expression is acknowledged.’ Signed …………………………………………….............. Date …………………………………………….............. ii 1. ABSTRACT Real options analysis can be used by investors to determine the value of potential investments that offer an owner the right but not the obligation to exercise a strategic decision at a predetermined time and price. Tools which are popular for valuing financial ...
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...risk * How does fit into Peru and our strategic objectives? * Tax rates/relief * Capital market conditions (we need a lot of capital) If you had to evaluate this as a traditional NPV project, what cash flows and what discount rate? * Project cash flows depend on price path → Monte Carlo simulates different paths * We can then use three possible outcomes (high, medium and low) and if we take the EV of the three → expected cash flows * We need to take the appropriate discount rate → probably pretty high Is this the right way to model this project? We are ignoring the options → flexibility is worth something * Abandon after exploration without penalty * Spend less on development * If we’re not happy with prices, we can lower or temp shutdown production * Abandon the project How do we value a project using real options? * Use traditional option models (binomial model or Black Scholes) to model variability/risk/the stochastic nature (as opposed to static nature) of key variables * Simulation models, e.g., a Monte Carlo...
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...Industry & Competitor Analysis BUS 630 – Spring 2008 Instructor: Email: Office Hrs: Course page: Russell Coff (www.bus.emory.edu/rcoff/) Russ_Coff@bus.emory.edu by appointment www.bus.emory.edu/rcoff/Bus630.html Phone: (404) 727-0526 FAX: (404) 727-6313 Revised 1/22/08 Course Overview and Objectives This course delves deeper into some strategy topics that you may have only touched upon earlier related to how firms gain a competitive advantage over rivals. In addition, since ICA tends to integrate quantitative and qualitative analysis more than other courses, you will have the opportunity to apply knowledge and skills you've gained across the curriculum (e.g., from finance, ISOM, Marketing, O&M, and Strategy). Building Competitive Advantage The broad focus of the course is on building competitive advantage with special emphasis on how firms can gain access to new resources or capabilities that may grant a competitive edge. We explore strategic investments that are required to compete effectively in uncertain and turbulent environments. Managers often throw up their hands and argue that planning isn’t useful when the landscape is shifting rapidly. However, with the right set of tools, strategic management can have an even greater impact in this setting. We place special emphasis on competitive advantages that stem from valuable and hard-toimitate resources or capabilities. Accordingly, we will focus much of our energy on the question of how to build, acquire or ally to gain...
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...Discussion Issues and Derivations What is the cost of using excess capacity? Firms often use the excess capacity that they have on an existing plant, storage facility or computer resource for a new project. When they do so, they make one of two assumptions: 1. They assume that excess capacity is free, since it is not being used currently and cannot be sold off or rented, in most cases. 2. They allocate a portion of the book value of the plant or resource to the project. Thus, if the plant has a book value of $ 100 million and the new project uses 40% of it, $ 40 million will be allocated to the project. We will argue that neither of these approaches considers the opportunity cost of using excess capacity, since the opportunity cost comes usually comes from costs that the firm will face in the future as a consequence of using up excess capacity today. By using up excess capacity on a new project, the firm will run out of capacity sooner than it would if it did not take the project. When it does run out of capacity, it has to take one of two paths: &Mac183; New capacity will have to be bought or built when capacity runs out, in which case the opportunity cost will be the higher cost in present value terms of doing this earlier rather than later. &Mac183; Production will have to be cut back on one of the product lines, leading to a loss in cash flows that would have been generated by the lost sales. Again, this choice is not random, since the logical action to take is the one that...
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...Company Name: MW Petroleum Amoco Corporation was the fifth largest oil company in United States with 28 billion in operating revenues and 1.9 billion in net income. The low oil prices in the 1980s depressed the profitability of many oil companies and most of which responded with downsizing and other cost cutting measures aimed at overhead expenses. Amoco had already sold more than 750 million worth of small properties, which it felt could be more economically operated by companies with low overhead costs. Amoco conducted an extensive study on capital structure and profitability in 1988 and found that 85% of its margin in United States was provided by 11% of its producing fields and rest had disproportionately high overhead costs and repair costs. Based on this a strategy was formed to divest up to 1.2 billion worth of additional properties. As the spinoff could take almost two years it was decided to assemble the properties in a new free standing E&P company called MW Petroleum. In the 1990s MW was up for sale and Apache expressed interest in the deal. Apache, a Denver based operator of small- medium sized properties was an efficient and cost effective company and the business strategy was to “rationalize and reconfigure”. The strategy involved acquiring and controlling producing properties, and quickly turn around the efficiency. Apache was specifically interested in MW as it was a large company that would more than double Apache’s reserves and was comprised of properties...
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...could lower the reported earnings by as much as 50% and would adversely affect stock prices (Berton, 1993).A study by R.G. Associates Inc. found that in the year 2000, stock options overstated the earnings of the S&P companies by 9% (Geewax, 2002). For 2001, the average earnings of S&P companies would have been 23% lower if options were expensed (Weil & Segal, 2002). Botosan and Plumlee (2001) examined the effect of stock option expense on diluted EPS and Return on Assets (ROA) of 100 high growth US companies Based on an assessment of the SFAS 123 disclosures, these authors report that stock option expense has a material impact on diluted EPS and ROA for a majority of their sample companies. They also note that expensing of stock-based compensation is void if the financial impact of doing so is immaterial. Financial press reports suggest that Australian firms’ reported profits could be “collectively stripped of hundreds of millions in reported net profit” if accounting standards require the expensing of employee options ((2002) (August), p. 15.Oldfield, 2002). Merrill Lynch (Revell, 2004) reports that the average reduction in S&P 500 firms’ 2001 (2002) reported earnings would be 21% (23%) if stock options were expensed. More recent research also finds similar results. Using stock option disclosures, recent studies provide evidence that if stock-based compensation were to be expensed, it would significantly affect key financial performance measures of firms in...
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...Class A shares in the next 48 hours or postpone the offering indefinitely. Now whether MLCM was right or not it will be judged by real option valuation. We showed the decision analysis by using both the FCF and the net cash flow. We have used three options such as a. Timing option, b. Decision Tree Analysis, and c. Option to Wait (Black Scholes Model). |1. Timing Option | We have used Timing Option to calculate the NPV if the stocks were issued immediately. Here we consider FCF in the three methods. Here, we assume 30% probability for high demand, 40% for average and 30% for low demand. We calculated the net annual cash flow for each scenario and then calculated the expected NPV for the issuance. |Demand |Probability |Annual FCF |E(NPV) | |High |30% |142400.97 |686590.51 | |Average |40% |109539.20 |526734.24 | |Low |30% |76677.44 |366877.96 | If Spiegel issued the stocks immediately the Expected net present value gained by the company would be $526734.24 thousand. |2. Decision Tree Analysis | Here we consider three types of demand a. high, b. average, and c. low. Then we calculated the average cash flow for...
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...An employee stock option plan (also called a share-based compensation plan) is a compensation arrangement (award) established by a corporation. Under this plan, its employees, in exchange for their services, receive shares of stock, share options, or other equity instruments (or the corporation incurs liabilities to employees in amounts based on the price of its stocks). Mr. Lay’s option plans were considered as compensatory. A noncompensatory employee plan (share purchase plan) is designed by a corporation to raise capital or to obtain more widespread employee ownership of the corporate stock. Three criteria must be met for a share option plan to be noncompensatory: 1. Substantially all employees who meet limited employment qualifications may participate in the plan on an equitable basis. 2. The discount from the market price does not exceed the per-share amount of stock issuance costs avoided by not issuing the stock to public. A purchase discount of up to 5% automatically complies with this criterion. 3. The plan has no option features other than the following: (a) employees are allowed a short time (no longer than 31 days) from the date the purchase price is set to decide whether to enroll in the plan, and (b) the purchase price is based solely on the market price of the stock on the purchase date, and employees are permitted to cancel their participation before the purchase date and obtain a refund of any amounts previously paid. If all these criteria are met, the...
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...will cover 17 years (7 of approval process nad 10 yr period of exclusivity beginning in yr 7) 1 Assumptions: All Cash flows are expressed as after tax present values discounted to time zero, including capital expenditures At any point "failure," investment decision is to stop funding Assuming Standard deviation of 0.5 Using T= 7 years in Black-Scholes Valuation 2 Decision Tree See worksheet "Decision Tree" 3 Detailed description of Real Option Technique "First, using a decision tree, I came up with a simple expected value of $13,980,000 based on the costs to complete each phase, the probabilities of completing each phase, and the costs and probabilities associated with failure at each step in the approval process. The expected value of successful completion with Depression only was $36,390,000, for weight only $1,200,000 and for both $26,880,000. The expected value of failure (including failure at any phase) was ($59,490,000). Next, I calculated the Valuations of each successful outcome using the decision tree analysis and the spectrum of outcomes with an asymetric distribution of rewards. Using the probability of 14.55%, which is the combined probability for any sucess, I recalculated the valuations of each success (Depression only, Depression only after testing for both in phase III, Weight only, etc). This gave me some drastically different valuations for those outcomes that had very small probabilities to begin with and ended with a summed expected value for...
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...Three different methods of option pricing The three different methods of option pricing are: The Black-Scholes model, binomial trees and Monte Carlo Simulation. The three different methods of option pricing are: The Black-Scholes model, binomial trees and Monte Carlo Simulation. The three different methods of option pricing are: The Black-Scholes model, binomial trees and Monte Carlo Simulation. The three different methods of option pricing are: The Black-Scholes model, binomial trees and Monte Carlo Simulation. The three different methods of option pricing are: The Black-Scholes model, binomial trees and Monte Carlo Simulation. The three different methods of option pricing are: The Black-Scholes model, binomial trees and Monte Carlo Simulation. The three different methods of option pricing are: The Black-Scholes model, binomial trees and Monte Carlo Simulation. The three different methods of option pricing are: The Black-Scholes model, binomial trees and Monte Carlo Simulation. The three different methods of option pricing are: The Black-Scholes model, binomial trees and Monte Carlo Simulation. The three different methods of option pricing are: The Black-Scholes model, binomial trees and Monte Carlo Simulation. The three different methods of option pricing are: The Black-Scholes model, binomial trees and Monte Carlo Simulation. The three different methods of option pricing are: The Black-Scholes model, binomial trees and Monte Carlo Simulation. The three...
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...Running Head: MEMORANDUM Real Option Analysis Memorandum To: CEO From: ABC Date: June 5, 2010 Sub.: Real Option Analysis Introduction In the current competitive and dynamic business environment, it is necessary for an organization to consider all the aspects before making an investment decision in a venture. It is also essential for the management of an organization to perform the analysis of operational facilities and financial facilities in a country. It helps the management to make an effective decision in invest in a venture to expand its business operation. The analysis also helps to reduce some risk that may affect the business operation. Venture The management of the organization is seeking towards facilitating its business in a new uncharted territory. The new venture may be the expansion of current product line or a new product or service. The management of the company is seeking to adjust with the growing demand in Brazil by building a new Caterpillar factory in it. The company doesn’t have information about the operational, financial and capital position in Brazil that may cause an increase in the uncertainties for the business. The organization has a leading position that will be effective tom provide unique advantages to it that is not available for the rivals maintaining purely domestic operations. In the new venture, the management may shift its value chain activities across its operation networks to eliminate the impact of...
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...and that they had to protect their reputations and their compensation as the most successful executives in the U.S. When some of their business and trading ventures began to perform poorly, they tried to cover up their own failures. Management was compensated extensively using stock options. This policy of stock option awards caused management to create expectations of rapid growth in efforts to give the appearance of reported earnings to meet Wall Street's expectations. The stock ticker was located in lobbies, elevators, and on company computers.[44] At budget meetings, Skilling would develop target earnings by asking "What earnings do you need to keep our stock price up?" and that number would be used, even if it was not feasible.[24] The stock option system is not itself the problem. Excessive stock options and excessive corporate compensation give corporate executives too many incentives to manipulate the financial accounts and the stock price of the company. When huge cash or options bonuses are dependent upon achievement of one or a few narrowly defined profit or growth goals, the temptation to manipulate the numbers to get the rewards will be too great. The problem is not the stock option system but the excessive compensation given to executives in the United States, particularly compared to the salaries of regular employees of the company. “(1) The Executive Committee met on an as needed basis to handle urgent business matters between scheduled Board meetings. (2)...
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...Multi-period Capital Budgeting under Uncertainty: Real Options Analysis” Table of Contents Section | Name | Page no. | Letter of Transmittal | i | Acknowledgement | ii | Table of Contents | iii | Section-A | Introduction | 01-02 | | A.1 Introduction | 01 | | A.2 Rationale of the study | 01 | | A.3 Objective of Our Study | 02 | | A.4 Scope | 02 | | A.5 Methodology of the Study | 02 | | A.6 Limitations of the Study | 02 | Section-B | Comparing NPV with Decision Trees and Real Options | 03-08 | | B.1 Comparing NPV with Decision Trees and Real Options | 03-05 | | B.2 Recognizing Real Options | 05 | | B.3 Differences between NPV, Decision Trees, and Real Options | 05-08 | | B.4 Risk-Neutral Probabilities | 08 | Section-C | Three Key Assumptions for pricing Real Options | 09-10 | | C.1 Three Key Assumptions for pricing Real Options | 09-10 | Section-D | Valuing Real Options on Dividend-Paying Assets | 10-12 | | D.1 Valuing Real Options on Dividend-Paying Assets | 10-12 | Section-E | Types of Real Options | 12-13 | | E.1 Types of Real Options | 12-13 | Section-F | Valuing Combinations of Simple Real Options | 13-16 | | F.1 Valuing Combinations of Simple Real Options | 13-16 | Section-G | Valuing Compound Options | 17-21 | | G.1 Simultaneous Compound Options | 17-19 | | G.2 Sequential Compound Options | 19-21 | Section-H | Switching Option | 22-26 | | H.1 Switching Option | 22-26 | Section-I | An Example of how to evaluate...
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