Abstract
Six case studies illustrate the accounting, discounted cash flow (DCF), expected net present value (ENPV) and real options investment analysis methods:
-
A corporate software IT project – which considers the asset DCF, and the option to defer, the equivalent to a call option.
-
A power generator valuation – using the DCF method and switching options, represented as a series of call options on the plant, which can identify the value flowing into a firm’s income statement.
-
A pharmaceutical drug development – using DCF, ENPV and real options methods.
-
A manufacturing firm – illustrates residual earnings and growth options and examines growth through innovation and the sustainability issues around climate change.
-
The metamorphosis of a media firm – examines the abandonment option, with the exit from the firm’s existing operations to align its business model with the transformation to an information economy.
-
The sale of commercial real estate assets – which analyzes the put real option in the deferring of an office property sale.
The first, second, fourth and fifth case studies are hypothetical examples constructed to illustrate the industry issues and valuation methodologies. The third case study shows the various valuation methods used in the pharmaceutical and biotechnology industries, while the sixth case study appeared in the Real Estate Finance Journal.
This is a preview of subscription content, log in via an institution.
Buying options
Tax calculation will be finalised at checkout
Purchases are for personal use only
Learn about institutional subscriptionsPreview
Unable to display preview. Download preview PDF.
References
Baldwin, C.Y. and Clark, K.B. Design Rules: The Power of Modularity, MIT Press, Cambridge, MA, 2000.
Baumert, K., Herzog, T., and Pershing, J. Navigating the Numbers–Greenhouse Gas Data and International Climate Policy, World Resources Institute, 2005.
Berger, P., Ofck, E., and Swary, I. Investor valuation of the abandonment option, Journal of Financial Economics, 42: 257–87, 1996.
Brueggeman, W. and Fisher, J.D. Real Estate Finance and Investments, 10th edn, Irwin Publishing, 1996.
Bulan, L., Mayer, C., and Sommerville, C. Irreversible Investment, Real Options, and Competition: Evidence from Real Estate Development, unpublished manuscript, Faculty of Commerce, UBC, Vancouver, 2002.
Challa, R. Discovering multiple interacting options, Energy and Power Risk Management, July 2000.
Childs, P., Ott, H., and Riddiough, T. Effects of noise on optimal exercise decisions: the case of risky debt secured by renewable lease income, Journal of Real Estate Finance and Economics, 28: 109–21, 2004, 2003.
Clewlow, L. and Strickland, C. Implementing Derivative Models, Wiley, 1998.
Clewlow, L. and Strickland, C. Energy Derivatives, Pricing and Risk Management, Lacima, 2000.
DiMasi, J. and Grabowski, H. The cost of biopharmaceutical R&D: is biotech different? Managerial and Decision Economics, 28: 469–479, 2007.
DiMasi, J., Hansen, R., and Grabowski, H. The price of innovation: new estimates of drug development costs, Journal of Health Economics, 22, 151–185, 2003.
DiMasi, J.A., Hansen, R.W., Grabowski, H.G., and Lasagna, L. Cost of innovation in the pharmaceutical industry, Journal of Health Economics 10, 107–142.
Coleman, M., L’Heureux, S., and Friedman, D. Modeling the sale of corporate real estate assets: a case study using real options, The Real Estate Finance Journal, Spring 2004.
Dixit, A. and Pindyck, R. Investment under Uncertainty, Princeton University Press, 1994.
Fabozzi, F. and Jacob, D. (eds) The Handbook of Commercial Mortgage-Backed Securities, Wiley, 1996.
Foster, R. and Kaplan, S. Creative Destruction, Doubleday, 2001.
Geske, R. The valuation of compound options, Journal of Financial Economics, 1978.
Geske, R. and Zhou, Y. Capital Structure Effects on Prices of Firm Stock Options: Tests Using Implied Market Values of Corporate Debt, UCLA Working Paper, 2007a.
Geske, R. and Zhou, Y. Predicting Risk and Return of the S&P 500: Evidence from Index Options, UCLA Working Paper, 2007.
Grant, R. Contemporary Strategy Analysis, Blackwell, 2006.
Haug, E.G. The Complete Guide to Option Pricing Formulas, McGraw-Hill, 1998.
Hirsh, R. Power Loss, MIT Press, 1999.
Hooke, J. Security Analysis on Wall Street, Wiley, 1998.
International Energy Agency, World Energy Outlook 2011 Factsheet, 2011.
International Energy Agency, World Energy Outlook 2011, 2011.
Jones, J. What you should know about the newspaper industry, Frontline, PBS, February 2007.
Kellogg, D. and Charnes, J.M. Real options valuation for a biotechnology company, Financial Analysts Journal, May/June 2000.
Kelly, M. and Teufel, S. Fisher Investments on Health Care, Wiley, 2011.
Kohut, A., Doherty, C., Dimock, M., and Keeter, S. Online papers modestly boost newspaper readership, The Pew Reseach Center, 2006.
Kulatilaka, N., Balasubramanian, P., and Storck, J. Using real options to frame the IT investment problem, in Trigeorgis, L. (ed.) Real Options and Business Strategy, Risk Books, 1999.
L’Heureux, S. and Coleman, M. Efficient Management of Corporate-Owned Real Estate Assets: A Real-Options Based Model, unpublished manuscript, 2003a.
L’Heureux, S. and Coleman, M. The Determination of Real Rental Rates, unpublished manuscript, 2003b.
L’Heureux, S. and Coleman, M. The Real Options Valuation of a Hidden Real Estate Asset: The Case of a Carrier Hotel, unpublished manuscript, 2003c.
Lütolf-Carroll, C. From Innovation to Cash Flows, Wiley, 2009.
Mbanefo, A. Co-movement Term Structure and the Valuation of Energy Spread Options: Mathematics of Derivative Securities, Cambridge University Press, 1997.
McCraw, T. Prophet of Innovation, Belknap Harvard, 2007.
Merton, R. On the pricing of corporate debt: the risk structure of interest rates, Journal of Finance, 29 (2): 449–470, 1974.
MIT Roundtable on Corporate Risk Management, Journal of Applied Corporate Finance, 20(4): Fall 2008.
Myers, S. and Howe, C. A Life-Cycle Financial Model of Pharmaceutical R&D, MIT, April 1997.
Myers, S. and Shyam-Sunder, L. Measuring pharmaceutical industry risk and the cost of capital, in Helms, R.B. (ed.) Competitive Strategies in the Pharmaceutical Industry, Washington, DC, American Enterprise Institute Press, 1996.
Paul, S, Mytelka, D, Dunwiddie, C, Persinger, C, Munos, B, Lindborg, S and Schacht, A. How to improve R&D productivity: the pharmaceutical industry’s grand challenge, Nature Reviews - Drug Discovery, Volume 9, March 2010
Pearson, N. An efficient approach for pricing spread options, The Journal of Derivatives, Fall 1997.
Penman, S. Financial Statement Analysis and Security Valuation, Irwin McGraw-Hill, 2004.
Pew Center on Global Climate Change, Getting Ahead of the Curve: Corporate Strategies That Address Climate Change, October 2006.
Quigg, L. Empirical testing of real option-pricing models, Journal of Finance, 48: 621–640, 1993.
Ravindran, K. Low-fat Spreads, Over the Rainbow, Risk Publications, 1993.
Rose, R. A comprehensive strategy for federal investment in fuel cell technology and fuel infrastructure, Breakthrough Technologies Institute, Inc., 2003.
Rudie Harrigan, K. Declining Demand, Divestiture, and Corporate Strategy, Beard, 2005.
Schwartz, E.S. The stochastic behaviour of commodity price: implications for valuation and hedging, The Journal of Finance, LII(3): 923–973, 1997.
Schwartz, E.S. and Torous, W. Commercial Office Space: Tests of a Real Options Model with Competitive Interactions, UCLA, February 2003.
Schwartz, E.S. and Walter, N. Commercial Office Space: Tests of a Real Options Model with Competitive Interactions, working paper, The Anderson School, UCLA, 2003.
Stearns, P. The Industrial Revolution in World History, Westview Press, 2007.
Stewart, J. Allison, P., and Johnson, R. Putting a price on biotechnology, Nature Biotechnology, 19, September 2001.
Stowe, J. D., Robinson, T.R., Pinto, J.E., and McLeavey, D.W. Equity Asset Valuation, Wiley, 2007.
Sullivan, K., Chalasani, P., Jha, S., and Sazawal, V. Software design as an investment activity: a real options perspective, in Trigeorgis, L. (ed.) Real Options and Business Strategy, Risk Books, 1999.
Thomsett, R. Third Wave Project Management, Prentice Hall–Yourdon Press, 1993.
Titman, S. Urban land prices under uncertainty, American Economic Review, 75: 505–514, 1985.
Tong, T. and Reuer, J. Corporate Investment Decisions and the Value of Growth Options, 2004.
Trigeorgis, L. Real Options: Managerial Flexibility and Strategy in Resource Allocation, MIT Press, 1996.
US Congress, Office of Technology Assessment, Pharmaceutical R&D: Costs Risks and Rewards, OTA-M-522, Washington, DC: US Government Printing Office, February 1993.
U.S. Energy Information Administration, International Energy Outlook 2011, 2011.
Wellington, F. and Sauer, A. Framing Climate Risk in Portfolio Management, World Resources Institute, 2005.
Williams, J. Real estate development as an option, Journal of Real Estate Finance and Economics, 4, 1991–2008.
Zhou, Y. Pricing Individual Stock Options on Firms with Leverage, Anderson School of Management at UCLA, 2007.
Copyright information
© 2013 Jamie Rogers
About this chapter
Cite this chapter
Rogers, J. (2013). The Analysis of Investments. In: Strategy, Value and Risk. Palgrave Macmillan Finance and Capital Markets Series. Palgrave Macmillan, London. https://doi.org/10.1057/9780230392687_6
Download citation
DOI: https://doi.org/10.1057/9780230392687_6
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-35199-2
Online ISBN: 978-0-230-39268-7
eBook Packages: Palgrave Economics & Finance CollectionEconomics and Finance (R0)