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Part a please explain option to delay option to abandon and option to expand linked to the case study given in part a i am not able to link these options to the scenario well
The question says that they are considering buying the rights to the initial exploration. If they buy the rights then they do not have to then do more work after the initial exploration. Once they have done this, then they will know whether it is worth continuing or not – so if not they will abandon, but if yes they will expand the operation.
Hello,
I want to know, why the answer to Faoilean question, part b) say that shareholders have a CALL option on the business? I searched already in the forum for your explanation of this exam question: “Holding shares in a company is similar to holding a call option because if the debt in the company exceeds the asset value then the shareholders can walk away (due to limited liability) whereas if the assets exceed the debts then the shareholders will continue in the business in order to get the surplus”, which I understand. But is this not similar to PUT option? They can sell shares at market value if they do not want to hold shares in the company anymore. What am I missing?What makes it similar to a call option is that if the business does well then there is a gain to equity whereas if the company does badly the ‘loss’ is limited because of limited liability.
Nobody is selling shares – it is just a way of placing a current value on the business.
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