Deck 13: Strategic Flexibility and Real Options Analysis

Question 1

The five drivers of call option value are the value of the underlying asset,cost of exercise,risk-free rate,time to investment and volatility.

Answer 1

True

Question 2

Strategic flexibility might be enhanced by organizational structures,systems,or other internal resources that augment the responsiveness of an organization.

Answer 2

True

Question 3

Suppose an individual investor purchases a financial call and pays $10 per share to obtain the right,but not the obligation,to purchase 25 shares of a company's stock for $100 in the future.If the firm's share price collapses and the individual investor does nothing,he/she has only lost the original option purchase price of $250 ($10 x 25 shares).

Answer 3

True

Question 4

Cumulative volatility is a variable derived by combining the volatility and cost of exercise parameters.

Question 5

Having the right,but not the obligation,to purchase shares of a company's stock in the future helps firms reduce downside risk while accessing upside opportunities.

Question 6

Real options analysis offers a means of qualitatively evaluating the role of uncertainty in firms' investment decisions.

Question 7

An option provides a firm with the obligation to take some future specified action.

Question 8

In the case of call options,uncertainty relates negatively to an option's value.

Question 9

Only a few techniques are used to value real options.

Question 10

For real options,the current value of an underlying asset is equivalent to the current price of a stock.

Question 11

The degree to which growth options matter within industries varies greatly.

Question 12

Firms that are entrepreneurial tend to have greater strategic flexibility.

Question 13

The value of a firm can be expressed using the formula V = V_AIP + V_GO.

Question 14

When Joe's Computers made the decision to sell some of its equipment through the resale market,it was exercising the option to defer.

Question 15

The key strength of capital budgeting is that the tools are designed to value passive investments without flexibility.

Question 16

Critics of real options analysis suggest that it is overly technical and beyond the mathematical competence of many managers.

Question 17

An equity joint venture is an example of a growth option.

Question 18

The primary focus of the real options analysis perspective is centered on operational control.

Question 19

A strategy can be said to be flexible when it can be changed by all parties involved without negative consequences.

Question 20

Investments that confer multiple options that are built upon one another are called compound options.

Question 21

Options help firms reduce downside risk while accessing:

A) strategic decisions.
B) abandonment.
C) growth options.
D) upside opportunities.

Question 22

An equity joint venture is an example of a ____ option.

A) switching
B) defer
C) growth
D) compound

Question 23

Cisco Systems is widely known to have a(n) ____ strategy.

A) acquisition-led
B) real options-based
C) threshold investment
D) risk-adjusted

Question 24

Black-Scholes assumes that all options are European,meaning that the option can be exercised only on the date of the option's maturity.

Question 25

The key strength of capital budgeting lies in its ability to handle tangible:

A) cash flows.
B) investments.
C) benefits.
D) resource allocation.

Question 26

Abandonment options provide firms flexibility by allowing them to:

A) confer multiple options that are built upon one another.
B) exit deteriorating competitive situations.
C) combine features of various options.
D) combine irreversibility and uncertainty.

Question 27

For real options,the current value of the underlying asset is equivalent to the present value of the estimated ____ associated with the underlying asset.

A) capital expenditures
B) cash flows
C) profits
D) exercise price

Question 28

The value of real options is driven by five factors.Which of the following is NOT one of these factors?

A) cost of exercise
B) risk-free rate
C) volatility
D) future commitment

Question 29

In real-life situations,it is necessary to use option valuation methods since:

A) the discount rate can be obtained easily.
B) the discount rate cannot be obtained easily.
C) the discount rate is constant.
D) the discount rate is published daily in the Wall Street Journal.

Question 30

The degree to which growth options matter within industries:

A) is subject to seasonal fluctuations.
B) varies little.
C) is constant.
D) varies greatly.

Question 31

Real options and the analysis of these investments are important for all of the following reasons EXCEPT:

A) They are practically relevant.
B) They recast motives for strategic decisions.
C) They prevent the altering of investment thresholds.
D) They open new opportunities to bridge strategic and financial analyses.

Question 32

Real options are important in providing a bridge between:

A) important investment decisions.
B) strategic analysis and capital budgeting.
C) general tendencies in industries.
D) economic profits and discretionary future investments.

Question 33

In the electrical and electronics equipment industry,on average,____ percent of firm value is due to growth options.

A) 54
B) 48
C) 72
D) 29

Question 34

Which of the following is NOT a type of real option?

A) Compound
B) Switching
C) Abandonment
D) Compilation

Question 35

It can be argued that both ____ and ____ blossomed in parallel after World War I and that both are inherently interested in the allocation of a firm's resources to achieve value for shareholders.

A) capital budgeting;investment thresholds
B) strategic analysis;investment thresholds
C) capital budgeting;real options
D) strategic analysis;capital budgeting

Question 36

According to the text,____ was an early adoptor of real options analysis.

A) Enron
B) IBM
C) Ford
D) Dell

Question 37

Real options are 'real' because the immediate underlying asset is a:

A) real asset.
B) financial security.
C) stock investment.
D) downside obligation.

Question 38

Firms seeking value from real options require ____ and ____ that enable them to implement flexible strategies effectively.

A) leadership;systems
B) organizations;leadership
C) organizations;systems
D) organizations;management

Question 39

The first step in calculating a call option's value using the Black-Scholes formula is to calculate the value of the underlying asset and the present value of the exercise price.

Question 40

Increases in the risk-free rate will ____ the exercise price.

A) discount
B) increase
C) have no impact on
D) fix

Question 41

The key to constructing a(n) ____ is to work backwards to calculate the value of the option at each node.

A) Black-Scholes analysis
B) "up" or "down" movement
C) binomial tree
D) decision tree

Question 42

Discuss real options and the types that exist.

Question 43

The five parameters making up the value drivers for options can be reduced to two summary parameters:

A) NPV_q and option value.
B) NPV_q and cumulative volatility.
C) cost of exercise and cumulative volatility.
D) time of exercise and option value.

Question 44

What is strategic flexibility,and how do firms utilize it?

Question 45

Black-Scholes assumes that all options are European,meaning that the option can be exercised only on the date of the option's maturity.In reality,real options are often more like ____ options,which can be exercised early.

A) South American
B) Chinese
C) American
D) Russian

Question 46

The Black-Scholes method assumes that there ____ of uncertainty.

A) may be several sources
B) are several sources
C) is a dominant source
D) is a single source

Question 47

In many instances,the same economic factors that influence the value of the underlying asset also affect the:

A) volatility of investment.
B) cost of investment.
C) investment criteria.
D) timing of investment.

Question 48

The Black-Scholes option pricing formula for a(n) ____ financial call option is often used to value real options.

A) American
B) European
C) Asian
D) South American

Question 49

Black-Scholes assumes that the exercise price is:

A) known and constant.
B) unknown.
C) variable.
D) known and variable.

Question 50

The main reason to exercise a financial option early would be to realize a(n):

A) dividend payment.
B) fixed exercise price.
C) underlying asset.
D) distribution.

Question 51

Under typical application of using discounted cash flow analysis to calculate present values,estimated cash flows are:

A) discounted at the published market rate.
B) discounted at a risk-adjusted rate.
C) allocated across divisions of the firm.
D) optimized at the neutral rate.

Question 52

Discuss the value drivers for real options.

Question 53

The value of the original real option is affected by follow-on options when ____ options are involved.

A) single
B) compound
C) universal
D) financial