Question: A company is considering a project. It has only 10% debt in its capital structure, with a pre-tax cost of 8%. It has a

A company is considering a project. It has only 10% debt in

A company is considering a project. It has only 10% debt in its capital structure, with a pre-tax cost of 8%. It has a beta of 1.4; the risk free rate is 5%, and the equity risk premium is 6.5%. The project would be 90% equity funded. This would require an investment of $700,000 at the end of year 5 and this would produce a stream of cash flows with a present value of $650,000 at the end year 5. The volatility of the cash flows is 35% Assume WACC is 13.25%. The company considers this project to be a real option. Find the value of this real (call) option. (Total 25 Marks)

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