The telecom company ET, Inc was granted with the license to broadcast DTV. This license was granted by the Government for 30 years (starting from the concession date), and cost the firm 25 million euros, and has already been paid. The concession agreement states that the firm must start operating in 3 years, after which it loses any right to operate, without any penalty. To start operating, the firm needs to invest 100 million euros. There is uncertainty about the present value of the future cash flows of the project, and the current estimate is 110 million euros, with a 30% volatility. The risk free interest rate is 5%.



 Questions:

 1. What is the value of the investment opportunity? Please use a binomial tree with 3 steps.

 2. If the number of steps is infinite, what is the value of the investment opportunity?

 3. For which level of volatility the amount paid for the license would be worthless?

 4. Assume that the expected growth rate of the present value of the future cash flows is lower than the equilibrium rate of return by 5%. What is the value of the option to invest?

5. What is the value of the option to invest if there isn't a deadline for the firm to start operating? What is the impact of assuming a different growth rate?

6. Assume that the project can be abandoned, in which case the firm receives 90 million euros. What is the value of the option to abandon if it can be exercised during the next 3 years? What is the value of this option if it is perpetual?

Answer rating: 100% (QA)

ET Inc Investment Opportunity and Option Valuation 1 Value with 3step Binomial Tree Up factor u 1 vo... View the full answer