Assume that The Home Depot (THD) is considering opening a small store in France. The store...

Transcribed Image Text:

Assume that The Home Depot (THD) is considering opening a small store in France. The store will cost 100 million FF to build, and the present value of the expected cash flows from the store is 80 million FF. The management of THD believe that by opening this store, THD acquires the option to expand into a much larger store any time over the next 5 years. The cost of expansion will be 200 million FF. At the moment, the present value of the expected cash flows from the expansion is believed to be only 150 million FF. THD still does not know much about the market for home improvement products in France, and there is considerable uncertainty about this estimate. The variance is 0.08. Answer the following questions: i) NPV of the small store without considering the embedded option: The following questions relates to inputs for the valuation of the embedded option (using Black-Scholes Calculator) in the above investment: ii) Nature of Option: (Call/Put) iii) Current value of the asset: iv) Exercise Price: v) Time to expiration: Assume that The Home Depot (THD) is considering opening a small store in France. The store will cost 100 million FF to build, and the present value of the expected cash flows from the store is 80 million FF. The management of THD believe that by opening this store, THD acquires the option to expand into a much larger store any time over the next 5 years. The cost of expansion will be 200 million FF. At the moment, the present value of the expected cash flows from the expansion is believed to be only 150 million FF. THD still does not know much about the market for home improvement products in France, and there is considerable uncertainty about this estimate. The variance is 0.08. Answer the following questions: i) NPV of the small store without considering the embedded option: The following questions relates to inputs for the valuation of the embedded option (using Black-Scholes Calculator) in the above investment: ii) Nature of Option: (Call/Put) iii) Current value of the asset: iv) Exercise Price: v) Time to expiration:

Answer rating: 100% (QA)

i NPV of the small store without considering the embedded option To calculate the NPV of the small s... View the full answer