The Valuation of Real Option in the Corporate Finance Assignment

The Valuation of Real Option in the Corporate Finance - Assignment Example Due to the flexibilities viewed in management, actual real options are quite to relate properly to the size of the project, the operation of the project and the timing of the project once it has been established. In all cases used, every upfront expenditure that has not been recovered yet and related to this type of flexibility refers to the option premium. Additionally, real options apply in the valuation of the stock. There are different types of real options. The first one is options that relate to the size of the project (Angelis, 2002). This is whereby the scope of the project is not certain, constitutes are optional and the flexibility of the size of various facilities is valuable. In real options to expand, the project is designed with capability in excess of the output levels that are expected for it to give a high rate. The management gets the option of expansion that is exercising the options in case the given conditions go out to be favorable. Projects having expansion options cost more in establishing, the excess referred to as the option premium. In real options to contract, the project is designed in a way that the given output may be contracted in the future in case the conditions become unfavorable. Option exercise consists of one forgoing these future expenses. According to Angelis (2002), this is the same as put option and the excess upfront expense is the option premium. In real options to expand, projects are developed in a way that it can operate dynamically. The second type of real option is options that relate to timing and the project life. In this type of category, growth options are the most generic because they have options of exercising the projects that are profitable when initiated. When initiating the project, the management has the flexibility at the time the project needs to start.  Ã‚  

Investigating circuit city comany Article Example | Topics and Well Written Essays - 1250 words

Investigating circuit city comany - Article Example The company was one of the largest consumer-electronics retailers and was also one of the pioneers in the industry, having been founded by Samuel S. Wurtzel as a television store in 1949 (Hartung, 2010) Circuit City achieved tremendous growth from its inception through to the early 1990s. This growth was highlighted by the company’s stock increasing at an annual average rate of 50.5 percent in the decade after going public in 1983, beating all industry peers and placing it at the top of the Fortune 500 service companies' rankings for having the highest return to investors. (Gilligan, 2008) Emerging competitors like Best Buy and Wal-Mart, did not stand a chance of dethroning Circuit City as the dominant force in the consumer-electronics retail market during this period. However, before long, the scenario changed. The grasp that Circuit City held on the market steadily loosened following a string of decisions made in the 1990s. This began when the company tested new ventures tha t distracted its executives from the core business. Circuit City intended to keep up its rapid growth rate by exploring a variety of businesses. It created CarMax in 1993 and followed that by entering the home-security business, which it eventually sold. Later on it was to test the installation and repair of home air-conditioning and heating systems, which it discontinued. The chain even considered opening large furniture stores but scrubbed that plan. (Gilligan, 2008) After all this, the company still invested more than $200 million into creating and selling Divx, a digital video disc rental system. This was to be a massive failure as the system’s viability was questioned by Hollywood studios and other retailers, forcing the company to pull the plug on the project. Circuit City had a lot going on as its executives tried to figure what business to explore, all along straying further from its core business - consumer-electronic retailing. Why over-invest in unknown businesses with low growth rates, rather than invest in known markets with high growth rates? (Hartung, 2010) These experiments allowed Best Buy to gain considerable advantage over Circuit City. Circuit City was complacent in addressing the obvious growing threat from its most formidable competitor, Best Buy - a fatal mistake in the fiercely competitive and fast-evolving retail-electronics industry. Best Buy was a Minneapolis-based retailer that was half the size of Circuit City by sales and number of stores in the early 1990s. Circuit City did not take Best Buy seriously enough since they were not making as much revenue as they did, so why question a successful model they thought. Best Buy on the other hand did not want to emulate Circuit City; it was rather a question of how to be better and different from Circuit City. The intensity of Best Buy’s growth was so significant that by the late 1990s it had a commanding lead over Circuit City in sales per store and unseating Circuit City a s the top consumer-electronics retailer by revenue. From then on, Circuit City was always playing catch up. Due to the expansion of the business into new markets, Circuit City set up many of its new stores in areas with low market growth. These inferior locations opposed to high growth areas where its competitors set up shop, was later a real cause of concern since the new stores had lower returns. Circuit City di