Mr EF plans to open a patisserie. He has already prepared a business plan for this business idea and now intends to approach potential investors to provide start-up funds. The financial analysis shows that the project will have a negative net present value for investors if he opens only one patisserie. However, Mr EF would like to convince the investors that by considering a realistic expansion option in the analysis, the project could have a positive net present value. He intends to use the Black-Scholes option pricing model to value this start-up. In doing so, it should:

A) consider an interest rate equal to the discount rate in the calculation of the net present value

B) consider the net present value of the option to expand as the share price

C) assume a time to maturity equal to 1

D) assume that this entity represents a call option

E) for the exercise price, consider all the costs of the expansion plus the loss of the first confectionery shop

Answer rating: 100% (QA)

The detailed answer for the above question is provided below The correct answer is D assume that thi... View the full answer