Subject : Corporate Finance Theory

Please provide me answers with details that is based on the corporate finance theories

• Questions do not require a quantitative analysis or a numerical example

Q. 1 Corporate production procedures require two separate investments: (i) constructing a production capacity (i.e., building plants and installing equipment) and (ii) manufacturing products. The former usually takes longer and requires larger initial investments.

Discuss why a firm's over investments in production capacity (i.e., having a production capacity much larger than what the firm needs) can help maintain the market share by deterring the entrance of new competitors. Justify this investment decision from the perspective of the real option valuation.