The questions in this quiz are example problems that you will learn to answer in greater detail after you finish the entire course. For now, we will consider how to express a strategy as a combination of real options, adding elements of game theory. These are reflective open questions and the focus is on your thought process, rather than on you providing the exact same answer as the answer sheet. The questions will provide you with a first intuition on how DCF, Real Options and Game Theory can be applied.

Real Options in Venture Capital

Real options refer to choices on whether and how to proceed with business investments. Real options analysis gives management the flexibility to decide to delay, expand, abandon or reposition investments. Like financial options, real options have value under uncertainty. Depending on the resolution of uncertainty in the future, management has the choice - but not the obligation - to exercise its options.

An example involves a venture capitalist deciding whether to finance the next stage in a start-up.In order to deal with uncertainty the investor stages the investments in A, B, and C rounds as is shown below.

Observe that, from a real options perspective, each round is an option where the investor can get access to the next option, which will only be pursued it if it is favorable to do so. Please describe the growth options value of staged financing under uncertainty as a real option.

Growth Potential Country A Growth Potential Country B Success Start Geographic Expansion Growth Start Success Potential Domestic Country C Expansion Abandon / Defer Acquire Failure Geographic Growth Platform Expansion Potential Country D Failure Review Strategy\f3 C round financing 2 B round financing 1 A round Review financing Start-up Review financing Review120 100 Price 8 - 07/2010 01/2012 07/2013 01/2015 07/2016 DateVolatility over Time Period 2 0.06 0.05 0.04 Period 1 Volatility 0.03 0.02 0.01 0 Time