Hello again.
My question refers to the P4 sample question (Allegro Technologies Co.) and Question 2(iii) of the June 2010 paper( AggroChem).
I want to know what is the appropriate proxy to use for Pe - the exercise price when valuing a real option? And if the proxy will change depending on whether we are valuing a put option or a call option?
1. June 2010 is valuing a call option ( an acquisition/expansion). The proxy for Pe is the value of the outstanding debt calculated as the present value of a zero coupon bond offering the same yield as the current debt.
[ $3M X 1.08 to the power -5 = $2.04175M]
Allegro is valuing a put option( a possible disposal/abandon).But it uses the purchase price that Staccato Innovations Co (SIC) is willing to pay Allegro ($113,000,000) instead of present valuing SIC's outstanding debt.I'm puzzled at the two different methods being used. Would it be wrong to calculate Pe (exercise price) as the present value of SIC's loan notes to give
[ ($92M X 1.02) X 1.05 to the power -3 = $81,062,520.25 ?
Why are the two methods different? The sample question, Allegro, provides all the necessary information to be able to PV SIC's debt ( the debt, the interest rate, the time period 2016 - 2018) so why was this method not used? Is it because one is a put option and the other is a call?
My question refers to the P4 sample question (Allegro Technologies Co.) and Question 2(iii) of the June 2010 paper( AggroChem).
I want to know what is the appropriate proxy to use for Pe - the exercise price when valuing a real option? And if the proxy will change depending on whether we are valuing a put option or a call option?
1. June 2010 is valuing a call option ( an acquisition/expansion). The proxy for Pe is the value of the outstanding debt calculated as the present value of a zero coupon bond offering the same yield as the current debt.
[ $3M X 1.08 to the power -5 = $2.04175M]
Allegro is valuing a put option( a possible disposal/abandon).But it uses the purchase price that Staccato Innovations Co (SIC) is willing to pay Allegro ($113,000,000) instead of present valuing SIC's outstanding debt.I'm puzzled at the two different methods being used. Would it be wrong to calculate Pe (exercise price) as the present value of SIC's loan notes to give
[ ($92M X 1.02) X 1.05 to the power -3 = $81,062,520.25 ?
Why are the two methods different? The sample question, Allegro, provides all the necessary information to be able to PV SIC's debt ( the debt, the interest rate, the time period 2016 - 2018) so why was this method not used? Is it because one is a put option and the other is a call?
