eBook Video Investment Timing Option: Option Analysis Kim Hotels is interested in developing a new hotel...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
eBook Video Investment Timing Option: Option Analysis Kim Hotels is interested in developing a new hotel in Seoul. The company estimates that the hotel would require an initial investment of $20 million. Kim expects the hotel will produce positive cash flows of $3 million a year at the end of each of the next 20 years. The project's cost of capital is 13%. Kim expects the cash flows to be $3 million a year, but it recognizes that the cash flows could actually be much higher or lower, depending on whether the Korean government imposes a large hotel tax. One year from now, Kim will know whether the tax will be imposed. There is a 50% chance that the tax will be imposed, in which case the yearly cash flows will be only $2.2 million. At the same time, there is a 50% chance that the tax will not be imposed, in which case the yearly cash flows will be $3.8 million. Kim is deciding whether to proceed with the hotel today or to wait a year to find out whether the tax will be imposed. If Kim waits a year, the initial investment will remain at $20 million. Assume that all cash flows are discounted at 13%. Use the Black-Scholes model to estimate the value of the option. Assume that the variance of the project's rate of return is 0.0732 and that the risk-free rate is 5%. Do not round intermediate calculations. Enter your answer in millions. For example, an answer of $1.234 million should be entered as 1.234, not 1,234,000. Round your answer to three decimal places. Use computer software packages, such as Minitab or Excel, to solve this problem. $ 2.157 million eBook Video Investment Timing Option: Option Analysis Kim Hotels is interested in developing a new hotel in Seoul. The company estimates that the hotel would require an initial investment of $20 million. Kim expects the hotel will produce positive cash flows of $3 million a year at the end of each of the next 20 years. The project's cost of capital is 13%. Kim expects the cash flows to be $3 million a year, but it recognizes that the cash flows could actually be much higher or lower, depending on whether the Korean government imposes a large hotel tax. One year from now, Kim will know whether the tax will be imposed. There is a 50% chance that the tax will be imposed, in which case the yearly cash flows will be only $2.2 million. At the same time, there is a 50% chance that the tax will not be imposed, in which case the yearly cash flows will be $3.8 million. Kim is deciding whether to proceed with the hotel today or to wait a year to find out whether the tax will be imposed. If Kim waits a year, the initial investment will remain at $20 million. Assume that all cash flows are discounted at 13%. Use the Black-Scholes model to estimate the value of the option. Assume that the variance of the project's rate of return is 0.0732 and that the risk-free rate is 5%. Do not round intermediate calculations. Enter your answer in millions. For example, an answer of $1.234 million should be entered as 1.234, not 1,234,000. Round your answer to three decimal places. Use computer software packages, such as Minitab or Excel, to solve this problem. $ 2.157 million
Expert Answer:
Posted Date:
Students also viewed these finance questions
-
In contrast to our analysis in Section 5.4.3, Carlton and Loury (1980) suggest that a Pigouvian tax alone will not lead to a long run social optimum for competitive polluting firms. Using their...
-
Find the photon energy in joules and in electron volts for an electromagnetic wave of frequency (a) 100MHz in the FM radio band, and (b) 900 kHz in the AM radio band.
-
Evaluate the quality of the following pieces of audit evidence, suggesting how each could be used during an audit. (a) A written assurance from the clients managing director. (b) An analysis of...
-
Maslow divided human needs into five categories and contended that lower-level needs have to be met prior to achieving the highest need of self-actualization. Describe a situation in which this...
-
Medway Printers (MP) manufactures printers. Assume that MP recently paid $900,000 for a patent on a new laser printer. Although it gives legal protection for 20 years, the patent is expected to...
-
1. 1(Ch. 3) Cross Exchange Rate. Assume Brazil's real (BRL) is worth USD .45 and the Mexican peso (MXN) is worth USD .076.What is the cross rate BRL/MXN? 1.2 (Ch. 4) Aggregate Effects on Exchange...
-
Snowball, Inc. makes snowboards, which it sells to Ronnie's Sports Store. Ronnie's Sports Store sells Snowball snowboards to consumers, including Ed. Ed is injured while using the snowboard. In a prod
-
Most nations elect their national leader using a process known as the National Popular Vote while the United States uses the Electoral College. What are the pros and cons of the Electoral College,...
-
Computing Impairment of Patent In January of Year 1, Idea Company purchased a patent for a new consumer product for $442,000. At the time of purchase, the remaining legal life of the patent was 17...
-
In the Table below, the values found as a result of the sieving process of the A and B aggregates, which are made up of different groups, are given. Show whether the individual aggregates comply with...
-
Solve the logarithmic equation for X. log4(x+8)-log4(x-8)=3
-
Wilmur Corporation has announced that it will pay its first annual stock dividend of $1.05 per share exactly two years from today.Analysts estimate that this dividend will grow by 1.5% per year in...
-
Suppose you used a computer software program to calculate the logarithmic model below, where LN(X) represents the natural log of X. Predicted Y = 1,000 250*LN(X) Whenever X increases 15%, the...
-
A company has the following incomplete production budget data for the first quarter: In the previous December, ending inventory was 200 units, which was the minimum required, at 10% of projected...
-
Find the weight of the Hamilton cycle \(m ightarrow 0 ightarrow p ightarrow n ightarrow q ightarrow m\) in the given figure. 5 5, m 3 4 n 8 5' P 5 Weighted Complete Graph with Five Vertices
-
Use the graphs to determine if the given sequence of vertices represents a Hamilton path or not. 1. Graph \(A, b ightarrow c ightarrow d ightarrow e ightarrow f\) 2. Graph \(A, b ightarrow e...
-
Use Figure 12.253 to find a Hamilton path between vertices \(C\) and \(E\).
Study smarter with the SolutionInn App