The Real Options Approach to Strategic Capital Budgeting and Company Valuation

Transcription

1 The Real Options Approach to Strategic Capital Budgeting and Company Valuation Wouter DE MAESENEIRE Erasmus University Rotterdam

2 Table of Contents Introduction 1 Chapter 1 Traditional Valuation Methodologies versus Real Options Thinking Valuing a Goldmine The Opportunity to defer Investment Opening up a new Restaurant: small or large? Where does (naive) DCFgo wrong? The 3D Puzzles Example Why does DCF fail? When to use Real Options? 25 Chapter 2 A Printer on Option Terminology and Option Valuation Option Definition and Parameters Valuation of financial Options The Black and Scholes Model The binomial Model and the basic Valuation Idea: Option Replication and Risk Neutrality The replicating Portfolio Approach The binomial Model: risk-neutral Probabilities and risk-neutral Valuation The general multiplicative binomial Approach Other Option Valuation Methods 43 Chapter 3 An Introduction to Real Options Analysis Real Option Analysis: Definition Where do the Real Options of the Firm come from? An Overview of the various Types of Real Options Time to build/deferral Option Option to alter operating Scale Option to abandon Shutdown Option Input Flexibility 55

3 II THE REAL OPTIONS APPROACH TO STRATEGIC CAPITAL BUDGETING AND COMPANY VALUATION Output Flexibility Growth Options Some Examples of Projects that involve Real Options Saab's Expansion Option: the turbo-charged Engine for the 900 Model Car manufacturing Plants (Output Flexibility) Power Plants (Input Flexibility) Plant Construction in different Phases Modular Plants and Facilities Pilot or testing Projects/Test Marketing Options in the Movie Business R&D: the Case of new Drug Development Valuing a Mine Valuing an undeveloped Oil Reserve US Software Company: starts selling one of its Products in France via Sales Office and Internet Site." Amazon.com as a Portfolio of Options The Valuation of Tiscali at IPO Investments in Eastern Europe, China, India Microsoft, Intel, Cisco: Participations Staged Financing in Venture Capital Investments Option to abandon Valuing a Start-up Company How to value Real Options? 78 Chapter 4 Valuing Real Options A general Framework for valuing Real Options Identifying the Real Option Parameters Underlying Value Variance Exercise Price Riskless Interest Rate Maturity of the Option Dividend-like Effects Methodologies for Real Options Valuation Some additional Remarks on Real Option Valuation Valuing a Project with multiple Options Difference between Real Options and Decision Trees 102

4 TABLE OF CONTENTS III Real Options Thinking eliminates the Bias against Long Term Projects 102 Chapter 5 Real Option Applications and Cases Valuing a Product Patent Valuing an Expansion Option Valuing a Start-up Restaurant TheM-commerceProject A Real Options View on buy-and-build Strategies Equity as a Call Option on the Firm's Value: the Eurotunnel Example 127 Chapter 6 Advanced Real Option Applications Valuing Innovation and Patents UMTS Licenses Liberalized Electricity Markets T Structure of Investments in Power Plants Real Options in Investments in Power Plants Real Options in strategic Acquisitions Real Options and Game Theory Various Applications Energy Plants and Pollution Allowances Optimal Land Development Temporary versus permanent Employment Real Options and Risk Management A Real Options Perspective on Supply Chain Management An Overview of the Real Options Literature Early Critics on the traditional Valuation Paradigm A new Direction: conceptual Real Option Approaches Foundations of Option Pricing Risk-neutral Valuation Valuing each Real Option separately Multiple Options and Interdependencies Numerical Techniques The general Environment: Competition and strategic Real Options A Variety of Applications Even more Applications 166

5 IV THE REAL OPTIONS APPROACH TO STRATEGIC CAPITAL BUDGETING AND COMPANY VALUATION Chapter 7 Discussion and Conclusion Criticism on the Real Options Approach Real Options are hard to identify and to compute, and remain a Black Box Real Options are a new Economy Tool and have caused the Internet Bubble Real Options: old Wine in new Bottles? Real Options only work for tradable Assets Real Options are only valuable with good Management around Challenges that Real Options Analysis needs to address Refine Option Valuation Models Split the Value of Options Model actual managerial Behaviour Develop heuristics and user-friendly Software Value the whole Firm T Summary and Conclusion 174 Bibliography 179