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Dear Sir,
I am a bit confused about the calculation of Pa in real option and i hope you can help me.
In the exercise MMC (June 11) when we calculate Pa we include only the cash in from year 3 to year 6 (so excluding the option exercise price), but in the case Furlion (Mar/Jun16) Pa is calculated as present value of all the expected cash flows from the project including option exercise price.Why do we include the exercise price in the calculation of Pa for Furlion and in MMC we exclude it? Is this because one is an option to expand and the other one is an option to delay?
Can you help me to clarify this?In addition I have also a question about the APV (I am sorry if i am asking two different topics in the same question).
I am a bit confused when finance required for a planned investment have to cover also the issue costs. Sometimes these costs are included in
– PV of issue costs on debt (and this is clear)
– Tax shield so added to the value of the loan (this is clear too)but sometimes the tax shield is calculated only on the interest of the loan (so excluding issue costs).
Why don’t we always add the issue cost in the calculation of tax shield?thanks a lot for your help
regards,
MarcoIn Furlion the option price has not been included. Given that the NPV including the outflow of $15M is $0, then the PV for the inflows must be $15M for there to be a NPV of $0.
The tax shield is always based on the amount borrowed!!
If the issue costs are paid out of existing finance then the amount borrowed is equal to the amount needed for investment.
If, on the other hand, the issue costs are paid out of the amount borrowed, then the amount needed for the investment needs to be grossed up by the issue costs so as to arrive at the amount borrowed.If it is not clear from the wording of a question then, as always, state your assumption.
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