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A company is considering a project. It has only 10% debt in its capital structure, with a pre-tax cost of 8%. It has a beta of 1.4; the risk-free rate is 5%, and the equity risk premium is 6.5%. The project would be 90% equity funded. This would require an investment of K700 000 at the end of year 5 and this would produce a stream of cash flows with a present value of K650 000 at the end year 5. The volatility of the cash flows is 35%. The Company considers this project to be a real option. Assume WACC is 13.25%. Find the value of this real option.
Please do not simply type out a full question and expect to be provided with a full answer. You must have an answer in the same book in which you found the question, so ask about whatever it is in the answer that you are not clear about and then I will explain.
I assume that you have watched our free lecture on real options?
Hi, my question why did you take Pa as 12 million? Can you please explain the logic?
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