Episode Details

We started this class by looking at the option to expand, where your capacity to enter or expand into new (big) markets can justify up-front bad investments and then at the option to abandon poorly performing investments. We then valued financial flexibility as an option, and argued that it was worth more to capital-constrained companies with unpredictable and high-value-added investments. We continued with our examination of equity in trouble, debt-laden companies. Given that the equity in these companies takes on the characteristics of an option, we teased out three implications:
The equity in these companies will be valued as out-of-the-money options are and not as conventional stocks. Thus, they will retain their value, even in the face of daunting debt, and will become more valuable as the risk in the business increases and with longer term debt.
Start of the class test: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/tests/realoptions2mod.pdf
Slides: http://www.stern.nyu.edu/~adamodar/podcasts/valfall16/valsession23.pdf
Post class test: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session23test.pdf
Post class test solution: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session23soln.pdf

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