Consider the following statement about real options:

Decision tree analysis is more commonly used in valuing securities than real assets.

1. True or False: The preceding statement is correct.

a. False

b. True

2. Which type of real option allows a project to be expanded if demand turns out to be greater than expected?

a. Abandonment option

b. Investment timing option

c. Flexibility option

d. Growth option

Consider the following example:

Clemens Inc. is considering a $100 million investment in a new line of soft drinks. However, $100 million is a huge investment for Clemens; if things turn bad, it could wipe out the company. A few senior managers have suggested a smaller investment of $20 million to see if the market is as strong as they hope it is. If demand is strong and the opportunity is still available, Clemens will increase its investment at a later date.

3. This example describes a real option to .

a. Expand

b. Abandon