When estimating the value of an option on a traded stock, the expected return on the stock is irrelevant—as proven in option pricing theory. For the valuation of an option on an asset that is not traded, such as in the numerical example introduced in Exhibit 32.8, the expected cash flow returns are required. Discuss how that is still consistent with option pricing
Answer to relevant QuestionsWhat are some of the common features of the 2007–2009 stock market crash and previous market crashes—for example, Japan’s in the 1990s or the Internet bubble around the turn of the millennium? 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 ...Identify four risks associated with emerging markets that affect enterprise discounted cash flow (DCF) valuation. How should these risks be treated within the enterprise DCF model? How do you estimate the potential margin and capital turnover for a young, high-growth company? Are the company’s current margin and capital turnover relevant? Identify the value drivers embedded in the equity cash flow model. How do the equity cash flow drivers differ from the drivers of the enterprise DCF models?
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