Real Options in Finance ⋆
Total Page:16
File Type:pdf, Size:1020Kb
Load more
Recommended publications
-
Initial Public Offerings
November 2017 Initial Public Offerings An Issuer’s Guide (US Edition) Contents INTRODUCTION 1 What Are the Potential Benefits of Conducting an IPO? 1 What Are the Potential Costs and Other Potential Downsides of Conducting an IPO? 1 Is Your Company Ready for an IPO? 2 GETTING READY 3 Are Changes Needed in the Company’s Capital Structure or Relationships with Its Key Stockholders or Other Related Parties? 3 What Is the Right Corporate Governance Structure for the Company Post-IPO? 5 Are the Company’s Existing Financial Statements Suitable? 6 Are the Company’s Pre-IPO Equity Awards Problematic? 6 How Should Investor Relations Be Handled? 7 Which Securities Exchange to List On? 8 OFFER STRUCTURE 9 Offer Size 9 Primary vs. Secondary Shares 9 Allocation—Institutional vs. Retail 9 KEY DOCUMENTS 11 Registration Statement 11 Form 8-A – Exchange Act Registration Statement 19 Underwriting Agreement 20 Lock-Up Agreements 21 Legal Opinions and Negative Assurance Letters 22 Comfort Letters 22 Engagement Letter with the Underwriters 23 KEY PARTIES 24 Issuer 24 Selling Stockholders 24 Management of the Issuer 24 Auditors 24 Underwriters 24 Legal Advisers 25 Other Parties 25 i Initial Public Offerings THE IPO PROCESS 26 Organizational or “Kick-Off” Meeting 26 The Due Diligence Review 26 Drafting Responsibility and Drafting Sessions 27 Filing with the SEC, FINRA, a Securities Exchange and the State Securities Commissions 27 SEC Review 29 Book-Building and Roadshow 30 Price Determination 30 Allocation and Settlement or Closing 31 Publicity Considerations -
Real Options Valuation As a Way to More Accurately Estimate the Required Inputs to DCF
Northwestern University Kellogg Graduate School of Management Finance 924-A Professor Petersen Real Options Spring 2001 Valuation is at the foundation of almost all finance courses and the intellectual foundation of most valuation methods which we will examine is discounted cashflow. In Finance I you used DCF to value securities and in Finance II you used DCF to value projects. The valuation approach in Futures and Options appeared to be different, but was conceptually very similar. This course is meant to expand your knowledge of valuation – both the intuition of how it should be done as well as the practice of how it is done. Understanding when the two are the same and when they are not can be very valuable. Prerequisites: The prerequisite for this course is Finance II (441)/Turbo (440) and Futures and Options (465). Given the structure of the course, no auditors will be allowed. Course Readings: Course Packet for Finance 924 - Petersen Warning: This is a relatively new course. Thus you should expect that the content and organization of the course will be fluid and may change in real time. I reserve the right to add and alter the course materials during the term. I understand that this makes organization challenging. You need to keep on top of where we are and what requirements are coming. If you are ever unsure, ASK. I will keep you informed of the schedule via the course web page. You should check it each week to see what we will cover the next week and what assignments are due. -
The Promise and Peril of Real Options
1 The Promise and Peril of Real Options Aswath Damodaran Stern School of Business 44 West Fourth Street New York, NY 10012 [email protected] 2 Abstract In recent years, practitioners and academics have made the argument that traditional discounted cash flow models do a poor job of capturing the value of the options embedded in many corporate actions. They have noted that these options need to be not only considered explicitly and valued, but also that the value of these options can be substantial. In fact, many investments and acquisitions that would not be justifiable otherwise will be value enhancing, if the options embedded in them are considered. In this paper, we examine the merits of this argument. While it is certainly true that there are options embedded in many actions, we consider the conditions that have to be met for these options to have value. We also develop a series of applied examples, where we attempt to value these options and consider the effect on investment, financing and valuation decisions. 3 In finance, the discounted cash flow model operates as the basic framework for most analysis. In investment analysis, for instance, the conventional view is that the net present value of a project is the measure of the value that it will add to the firm taking it. Thus, investing in a positive (negative) net present value project will increase (decrease) value. In capital structure decisions, a financing mix that minimizes the cost of capital, without impairing operating cash flows, increases firm value and is therefore viewed as the optimal mix. -
Empirical Testing of Real Option in the Real Estate Market
View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Elsevier - Publisher Connector Available online at www.sciencedirect.com ScienceDirect Procedia Economics and Finance 24 ( 2015 ) 50 – 59 International Conference on Applied Economics, ICOAE 2015, 2-4 July 2015, Kazan, Russia Empirical Testing of Real Option in the Real Estate Market Andrejs Čirjevskisa*, Ernests Tatevosjansb a RISEBA, Meza street 3, Riga LV 1048, Latvia, bRISEBA, Meza street 3, Riga LV 1048, Latvia Abstract Existing researches have used real options valuation (ROV) theory to study investment in energy, oil and gas, and pharmaceutical sectors, yet little works have empirically examined ROV theory to study investment in a real estate market of EU countries that undergone severe economic crisis and now recovering. The aim of this paper is to test empirically ROV application for real estate development project with significant volatility in terms of price and cost and under strict legislation’s constraints. Paper illustrates empirical testing of ROV application of the investment project “Sun Village” developed by the ABC Project Ltd Company in Latvia in 2014. We apply three ROV methods: option space matrix “Tomato Garden”, Black-Scholes option pricing model and binominal option pricing model before we presented final research result. The flow chart of ROV application in real estate development projects presented in our research can serve as a “road map” for many similar projects in EU suffering real estate market bubble burst and present uncertainty. © 2015 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license © 2015 The Authors. -
Real Option Valuation Real Option Valuation in High-Tech Firm Tech Firm
Gothenburg University Schoool of Economics and Commercial Law Industrial and Financial Program Real Option Valuation in High-Tech Firm Supervisor: Wilhborg Clas Authors: Hu Pengfei Hua Yimin Real Option Valuation in High-Tech Firm Abstract In traditional financial theory, the discounted cash flow model (or NPV) operates as the basic framework for most analyses. In doing valuation analysis, the conventional view is that the net present value (NPV) of a project is the measure of the value that is the present value of expected cash flows added to the initial cost. Thus, investing in a positive (negative) net present value project will increase (decrease) value. Recently, this framework has come under some fire for failing to consider the options which are the managerial flexibilities, which are the collection of opportunities. A real-option model (Option-based strategic NPV model) is estimated and solved to yield the value of the project as well as the option value that is associated with managerial flexibilities. Most previous empirical researchers have considered the initial-investment decision (based on NPV model) but have neglected the possibility of flexible operation thereafter. Now the NPV must be compared with the strategic option value, by which investment is optimal while the NPV is negative. This leads investors to losing the chances to expand themselves. In the paper we modify the NPV by taking into account real options— theme of this paper, or strategic interactions. R&D, Equity and Joint Ventures will be viewed as real options in practice of case studies of this paper. Keywords: Discount rate, Net present value (NPV), Option(s) and valuation i Hu/Hua Real Option Valuation in High-Tech Firm Acknowledgments Those persons who have inspired us, helped us, or corrected us in the course of time are too numerous to be named. -
The Importance of the Capital Structure in Credit Investments: Why Being at the Top (In Loans) Is a Better Risk Position
Understanding the importance of the capital structure in credit investments: Why being at the top (in loans) is a better risk position Before making any investment decision, whether it’s in equity, fixed income or property it’s important to consider whether you are adequately compensated for the risks you are taking. Understanding where your investment sits in the capital structure will help you recognise the potential downside that could result in permanent loss of capital. Within a typical business there are various financing securities used to fund existing operations and growth. Most companies will use a combination of both debt and equity. The debt may come in different forms including senior secured loans and unsecured bonds, while equity typically comes as preference or ordinary shares. The exact combination of these instruments forms the company’s “capital structure”, and is usually designed to suit the underlying cash flows and assets of the business as well as investor and management risk appetites. The most fundamental aspect for debt investors in any capital structure is seniority and security in the capital structure which is reflected in the level of leverage and impacts the amount an investor should recover if a company fails to meet its financial obligations. Seniority refers to where an instrument ranks in priority of payment. Creditors (debt holders) normally have a legal right to be paid both interest and principal in priority to shareholders. Amongst creditors, “senior” creditors will be paid in priority to “junior” creditors. Security refers to a creditor’s right to take a “mortgage” or “lien” over property and other assets of a company in a default scenario. -
Announcement Has Been Approved for Release by the Board
ASX RELEASE 19 JULY 2021 ASX:NES RENOUNCEABLE RIGHTS ISSUE TO RAISE UP TO $2 MILLION • 2 for 7 Renounceable Rights Issue to raise up to $2 million • Attractively priced at 4.7 cents per share • Discount of 20% to the 10-day VWAP of 5.9 cents and 31% to the 90-day VWAP of 6.8 cents • With every two New Shares, shareholders receive one free attaching New Option • New Options will have Exercise Price of 8 cents, term of two years and will be listed • Shareholders can trade their rights and apply for additional shares and options • Rights to start trading from 23 July 2021 • Directors to participate for their full entitlement and will sub-underwrite a portion of the shortfall • Funds to be used to complete current drilling programs and expand upon the company’s exploration programs at its Woodline and Tempest projects. Nelson Resources Limited (ASX: [ASX]) (“Nelson Resources” or “the Company”) is pleased to announce a Renounceable Rights Issue to raise up to $2 million to fund completion of its current drilling programs and expand upon its exploration programs at its Woodline and Tempest projects. These expanded programs will include additional drilling and geophysics programs to be conducted with the company’s wholly owned drilling and geophysics equipment. Under the offer, shareholders will be offered two New Shares for every seven existing shares held on 26 July 2021 (“Record Date”), with one attaching listed Option, exercisable at $0.08 and expiring on 31 August 2023, for every two New Shares subscribed. The rights issue price represents a discount of: • 20% to the Company’s 10 day VWAP of $0.059; and • 31% to the Company’s 90 day VWAP of $0.068. -
Capital Structure and the Financial Crisis
Journal of Finance and Accountancy Capital structure and the financial crisis Richard H. Fosberg William Paterson University ABSTRACT The financial crisis on the late 2000s had a major impact on the financial markets, greatly reducing security issuance by firms and lending by financial institutions. One of the consequences of the disruption of the capital and lending markets caused by the financial crisis was to significantly increase the amount of debt in firm capital structures. Specifically, it is shown that between 2006 and 2008 the financial crisis and simultaneous recession caused sample firms to increase their market debt ratios (MDRs) by, on average, 5.5%. After eliminating the effects of the recession on firm capital structure it was found that almost all (5.1%) of the debt accumulation that occurred was a consequence of the financial crisis. Additionally, it was found that the effect of the financial crisis on firm capital structure was almost completely reversed by the end of 2010. An analysis using book debt ratios (BDRs) found similar, but smaller, financial crisis effects. Copyright statement: Authors retain the copyright to the manuscripts published in AABRI journals. Please see the AABRI Copyright Policy at http://www.aabri.com/copyright.html. Capital structures, page 1 Journal of Finance and Accountancy INTRODUCTION In the late 2000s, a financial crisis began in the United States and quickly spread to Europe and other parts of the world (Aubuchon and Wheelock (2009)). The net effect of the financial crisis was to greatly disrupt the financial markets, reduce the amount of debt and equity capital financing available to businesses and to create a severe recession in the U. -
Real Options Valuation Applied to Transmission Expansion Planning
1 Real Options Valuation Applied to Transmission Expansion Planning S. Lumbreras, D.W. Bunn, A. Ramos, M. Chronopoulos Abstract- Transmission Expansion Planning (TEP) is a complex problem where building a new line involves a long permitting process of around 10 years. Therefore, transmission expansion must anticipate the evolution of uncertainties particularly those derived f by changes in the capacity and location of new generating facilities. As it is not possible to request permits for all possible lines, priorities must be established. We develop a formulation to use Real Options Valuation (ROV) to evaluate the potential benefit of candidate lines and thereby identify priority projects. We present a feasible representation of optionality in TEP projects and propose a tractable evaluation of option value. The proposed technique identifies the candidate transmission lines with the highest potential, as well as their main value drivers. This is implemented on a realistic case study based on the Spanish system. Index Terms— Power Transmission, Circuit Optimization, Mathematical Programming I. INTRODUCTION ransmission Expansion Planning (TEP), conventionally defined as the problem of “deciding which new lines will enable the system to satisfy forthcoming loads with the required degree of reliability” T(Kaltenbach, Peschon, & Gehrig, 1970), is a key element of power systems strategy. As such, it has received considerable attention in the academic literature (Latorre, Cruz, Areiza, & Villegas, 2003). Despite the extensive nature of this research, the topic remains challenging in both methodology and practice. This is mainly due to the inevitable need for approximation methods in formulation and pragmatic approaches in practice. To envisage the load flow consequences of all possible sequences of upgrades to an existing system, over a long time horizon, with stochastic evolutions of generation expansion, demand and fuel prices, is a task of unmanageable dimensionality. -
UP-C Initial Public Offering Structures: Overview, Practical Law Practice Note
UP-C Initial Public Offering Structures: Overview, Practical Law Practice Note... UP-C Initial Public Offering Structures: Overview by Joshua Ford Bonnie, William R. Golden, and Andrew B. Purcell, Simpson Thacher & Bartlett LLP, with Practical Law Corporate & Securities Maintained • USA (National/Federal) This Practice Note provides an overview of the Umbrella Partnership – C-corporation (UP-C) initial public offering (IPO) structure and selected related legal and tax considerations. By implementing an UP-C structure instead of more traditional IPO structures and entering into tax receivable agreements, pre-IPO owners of businesses taxed as partnerships can receive substantial post- IPO tax benefits. Contents Basic Features and Implementation of the UP-C IPO Structure UP-C IPO Mechanics Exchanging OP Units for Pubco Shares Governance and Voting UP-C Organizational Structure Chart Exchange Rights and Liquidity Tax Benefits Tax Receivable Agreement Distributions and Dividend Policy Maintaining Parity between OP Units and Pubco Shares Certain Considerations For businesses taxed as partnerships that are considering an initial public offering (IPO), the Umbrella Partnership – C- corporation (UP-C) structure can offer pre-IPO owners the liquidity and other benefits of a public listing in a more tax-efficient manner than the traditional alternative of converting into a C-corporation at the time of an IPO. Although somewhat novel even a decade ago, IPOs utilizing the UP-C structure have become increasingly common. For information on the taxation of partnerships, see Practice Note, Taxation of Partnerships. For a list of resources on IPOs more generally, see the Initial Public Offerings Toolkit. For information on the UPREIT structure (which was a precursor to the UP-C structure), see REITs: Overview. -
The Real Options Approach to Evaluating a Risky Investment by a New Generation Cooperative: Further Processing By
The Real Options Approach to Evaluating a Risky Investment by a New Generation Cooperative: Further Processing by Michael D. Bailey and Thomas L. Sporleder1 Abstract Farmers continue to be interested in opportunities for value added production through further processing. New Generation Cooperatives (NGCs) offer member commitment through up-front capital contributions on the part of members. For a potential start-up NGC, one of new and novel issues that face the management of an NGC is making project commitments against the total capital available, both equity and debt capital. Because of the up-front capital commitment by members, NGCs invite managers to make commitments in phases, rather than one initial go or no-go decision. Thus, the capital decision is complex and requires managerial vision in terms of an uncertain world beset by constant shifts in prices, interest rates, consumer tastes, and technology. This paper considers a novel means of evaluating this investment decision, one that encompasses risk components mentioned above. When the outcome of an investment is least certain, real options analysis has the greatest potential analytic value. As time goes by and prospects for an underlying investment become clearer, the value of an option diminishes. The methodology of real options is novel because it encourages managers, at time t, to weigh equally all imaginable alternatives, good and bad. A project’s net present value (NPV) is simply the difference between the project’s value and its cost. By definition of the NPV rule, managers should accept all projects with a net present value greater than zero. The distinction between real options and conventional decision-making arises in that the standard net present value rule does not take into account managerial flexibility over time. -
Guide to Going Public Strategic Considerations Before, During and Post-IPO Contents
Guide to going public Strategic considerations before, during and post-IPO Contents 1 | Guide to going public Foreword For private companies seeking to raise capital and capital-held companies considering their strategic options for funding for provide exits for their shareholders, an initial public growth, including a public listing. We have professionals with extensive, offering (IPO) can be a superior route and strategic proven experience with domestic and international capital markets. Our professionals have deep knowledge of your industry, which allows us to option to funding growth and to access deep pools of create interdisciplinary teams that will steer you onward, through and liquidity. While challenging markets will come and go, beyond your IPO and support your plans for growth. it’s the companies that are fully prepared that will We are confident this Guide to going public will give you an initial overview best be able to create value and fully leverage the and checklists of the key phases in going public from a global perspective. IPO windows of opportunity whenever they are open. It is based on EY insights from many IPO transactions, to help you begin Companies that have completed a your IPO value journey, so that you are well prepared to transform your successful IPO know the process private company into a successful public company that continually delivers The companies that involves the complete transformation value to its shareholders. With more than 30 years’ experience helping of the people, processes and culture companies prepare, grow and adapt to life as a public entity, we are well- are fully prepared will be of the organization from a private suited to take you on your IPO journey providing tailored support and enterprise to a public one.