Consider the example of the valuation of the pharmaceutical R&D project described in the final section of the chapter. Under the assumptions stated, the DTA value is identical to the ROV value. Calculate what volatility (as modeled in terms of parameters u and d) would make the ROV value differ from the DTA value, and discuss what drives this difference.
Answer to relevant QuestionsIf growth is a significant value driver, does getting bigger translate into creating value? Discuss the relative merits of including risk adjustments in cash flow or in discount rates—especially for high-growth companies in emerging markets—and show how both approaches can be aligned. Describe the benefits of a scenarioDCFvaluation model. What factors should be considered when constructing scenario parameters? Why do most young, high-growth companies have negative earnings? Why is maturity mismatch important for understanding a bank’s risk and analyzing its performance?
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