Investment Timing Option: Option Analysis

Kim Hotels is interested in developing a new hotel in Seoul. The company estimates that the hotel would require an initial investment of $20 million. Kim expects the hotel will produce positive cash flows of $3 million a year at the end of each of the next 20 years. The project's cost of capital is 13%.

Kim expects the cash flows to be $3 million a year, but it recognizes that the cash flows could actually be much higher or lower, depending on whether the Korean government imposes a large hotel tax. One year from now, Kim will know whether the tax will be imposed. There is a 50% chance that the tax will be imposed, in which case the yearly cash flows will be only $2.2 million. At the same time, there is a 50% chance that the tax will not be imposed, in which case the yearly cash flows will be $3.8 million. Kim is deciding whether to proceed with the hotel today or to wait a year to find out whether the tax will be imposed. If Kim waits a year, the initial investment will remain at $20 million. Assume that all cash flows are discounted at 13%. Use the Black-Scholes model to estimate the value of the option. Assume that the variance of the project's rate of return is 0.0585 and that the risk-free rate is 6%. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answer to three decimal places.

Use computer software packages, such as Minitab or Excel, to solve this problem.

$ ??? million

Investment Timing Option: Option Analysis

Kim Hotels is interested in developing a new hotel in Seoul. The company estimates that the hotel would require an initial investment of $20 million. Kim expects the hotel will produce positive cash flows of $3 million a year at the end of each of the next 20 years. The project's cost of capital is 13%.

Kim expects the cash flows to be $3 million a year, but it recognizes that the cash flows could actually be much higher or lower, depending on whether the Korean government imposes a large hotel tax. One year from now, Kim will know whether the tax will be imposed. There is a 50% chance that the tax will be imposed, in which case the yearly cash flows will be only $2.2 million. At the same time, there is a 50% chance that the tax will not be imposed, in which case the yearly cash flows will be $3.8 million. Kim is deciding whether to proceed with the hotel today or to wait a year to find out whether the tax will be imposed. If Kim waits a year, the initial investment will remain at $20 million. Assume that all cash flows are discounted at 13%. Use the Black-Scholes model to estimate the value of the option. Assume that the variance of the project's rate of return is 0.0654 and that the risk-free rate is 8%. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answer to three decimal places.

Use computer software packages, such as Minitab or Excel, to solve this problem.

$   million

1. Sjcam used a penetration pricing strategy to introduce its Legend action camera to compete with the latest GoPro offering. Which of the following conditions would argue for using a penetration pricing strategy when introducing this new camera?

a. A large potential market exists, even at a high price.

b. Technological problems still exist for competitors, prohibiting their entry into the market for at least six months.

c. Increasing volume substantially reduces production costs.

d. Consumers perceive a price-quality relationship.

e. The product is relatively price insensitive (price inelastic).

2. Apple offers its iPhone XS for $999, under the presumption that consumers see the smartphone as priced at “something over $900” rather than “about $1,000.” This is an application of what pricing strategy?

a. prestige pricing

b. below-market pricing

c. odd-even pricing

d. target pricing

e. customary pricing

3. Which of the following would be an example of a variable cost for a hotel like the Marriott Marquis Hotel, which caters to an upscale clientele?

a. the average daily rate paid by women in targeted demographics staying at the hotel

b. cleaning supplies and housekeeping wages

c. the salary of the hotel manager

d. the rent for a parking garage used by employees

e. the price charged for renting a ballroom in the hotel

4. Uber and Lyft customers often complain about the practice of “surge” or “prime-time” pricing used by these companies during periods of peak demand. This is an example of a __________ pricing policy.

a. promotional

b. competitive

c. discount

d. dynamic

e. customer

1. PepsiCo, near the top of Table 2-5 in the chapter, is a company that provides
comprehensive financial statements. Go to finance.yahoo.com. In the box next to
“Get Quotes,” type in its ticker symbol PEP and click.
2. Scroll all the way down to “Financials” and click on “Income Statement.” Compute
the annual percentage change between the three years for the following:
a. Total revenue.
b. Net income applicable to common shares.
3. Now click on “Balance Sheet” and compute the annual percentage change
between the three years for the following:
a. Total assets.
b. Total liabilities.
4. Write a one-paragraph summary of how the company is doing.

On June 15, 2016, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington, D.C., for $310 million. The expected completion date is April 1, 2018, just in time for the 2018 baseball season. Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows ($ in millions): 2016 2017 2018 Costs incurred during the year $ 70 $ 60 $ 30 Estimated costs to complete as of December 31 130 30 — Compute the revenue and gross profit will Sanderson report in its 2016, 2017, and 2018 income statements related to this contract assuming Sanderson recognizes revenue over time according to percentage of completion. Compute the amount of revenue and gross profit or loss to be recognized in 2016, 2017, and 2018 using the completed contract method. Suppose the estimated costs to complete at the end of 2017 are $120 million instead of $30 million. Compute the amount of revenue and gross profit or loss to be recognized in 2017 using the percentage of completion method.

For a live play like The Tempest or any play similar hat does the performance suggest about the role of theater in contemporary culture?

The following facts relate to questions 1 through 10: The City of Oxford, Mississippi (population just under 24,000) passed a bond issue for $2,500,000, 4.5 percent, semiannual interest, 10 year bonds to finance the construction of a second high school to be called Yoknapatawpha High, named in memory of the Pulitzer Prize winning author, William Faulkner. The State also contributed $110,000 for construction of the gymnasium. The contractor selected then submitted her contract for $2,080,000 to commence on January 2, 2019, with the project’s estimated completion in late 2019.

1. The entry in the Capital Projects Fund receiving the transferred state monies from the General Fund would include a:

A. Credit to Other Financing Sources, $110,000.

B. Debit to Other Financing Uses, $110,000.

C. Credit to Cash, $110,000.

D. Credit to Grants Receivable, $110,000.

2. When the contractor submitted a $700,000 progress billing, the following entry in the Capital Projects Fund would include:

A. Debit to Encumbrances—2019, $700,000

B. Credit to Cash, $700,000.

C. Debit to Encumbrances Outstanding—2019, $700,000.

D. Debit to Construction-work-in progress, $700,000.

3. Assuming the partial billing was approved for payment and the expenditure and liability (contracts payable) was recorded for $700,000; however, Oxford has a policy of not paying 100 percent, but retaining 20 percent as a retained percentage. The entry in the Capital Projects Fund to record the allowed payment and retained percentage would include:

A. Credit to Cash, $560,000.

B. Debit to Contracts Payable, $560,000.

C. Credit to Contracts Payable—Retained Percentage, $560,000.

D. Debit to Contracts Payable, $140,000.

How much time do Americans living in or near cities spend waiting in traffic, and how much does waiting in traffic cost them per year? The file “congestion.xlsx” includes this cost for 31 cities. For the time Americans living in or near cities spend waiting in traffic and the cost of waiting in traffic per year: c. Construct a boxplot. Are the data skewed? If so, how? d. Compute the correlation coefficient between the time spent sitting in traffic and the cost of sitting in traffic. e. Based on the results of (a) through (c), what conclusions might you reach concerning the time spent waiting in traffic and the cost of waiting in traffic?

1. The National Park Service has asked you to construct a value of the Grand Canyon. Explain the pros and cons of using the travel cost method to do this. Would you prefer the hedonic method or the stated preference method? Why or why not?

1. The National Park Service has asked you to construct a value of the Grand Canyon. Explain the pros and cons of using the travel cost method to do this. Would you prefer the hedonic method or the stated preference method? Why or why not?