Valuing Joint Ventures Using Real Options

As the valuation of strategic measures becomes increasingly important, relatively few articles have discussed the valuation methods pertained for joint ventures. This paper shows that real options contribute to a better valuation of joint venture projects through superior reflection of the value drivers compared to traditional valuation methodology. Particularly, the strategic value of a joint venture and the value of flexibility that stems from a less than full commitment can be determined using options valuation. Besides reviewing the basics of real options, the paper discusses the key levers of joint ventures and shows the power of real options in the valuation process. We apply four option types (option to defer, option to expand/acquisition option, option to innovate, and option to abandon) to an imaginary joint venture example and show how to use the Black/Scholes and binomial valuation techniques to value these options. Of the four option types, particularly the option to innovate is important, as it allows to reflect the strategic value of a joint venture generating future business opportunities. Despite its advantages, this valuation methodology also has some drawbacks that are discussed in the concluding section.Joint ventures, real options, option valuation, Black/Scholes model, binomial option valuation

Playing at Serial Acquisitions

Behavioral biases can result in suboptimal acquisition decisions-with the potential for errors exacerbated in consolidating industries, where consolidators design serial acquisition strategies and fight escalating takeover battles for platform companies that may determine their future competitive position. To guide objective managerial judgment, and to rationally anticipate the irrational behavior of rival bidders or financial markets, this article proposes a modified option-game toolkit for serial acquisition strategy. It brings together insights from both strategy and finance, which quantify acquisition strategies, thus allowing executives to make rational intuitive decisions under uncertainty

Managerial risk in information technology investments : effects of framing, narrow framing and time inconsistent preferences on real options exercise decisions

Real options theory has been advocated as a solution to risky IT investment decisions. IT investments decisions are risky due to uncertainty around future outcomes and the inability of traditional financial measures (like NPV, IRR) to account for inherent managerial flexibility. On the one hand, it is argued that real options analysis captures and formalizes managers' intuition, hence creating a disciplined decision making process. On the other hand, the intuitive valuation of the options is criticized due to the prevalent effects of various judgmental biases. In this dissertation, we explore three potential biases that can affect the real option exercise decisions in terms of either suboptimal option exercise choice due to framing and narrow framing effects, or suboptimal exercise time due to time inconsistent preferences of IT managers. We test for framing effects in individual IT project decisions and narrow framing effects in IT portfolio decisions, by conducting an online experiment among top and mid-level IT professionals. The results show that IT professionals are prone to framing real options at exercise time and simplifying complicated real option exercise decisions by isolating them in IT portfolios. Further, their decisions are influenced by their personal risk preferences. We analyze the effect of time-inconsistent preferences of present-biased managers on the exercise time of real growth and abandonment options and the realized values using a discrete time option valuation model. The results show that present-biased managers are more likely to exercise growth options early when the net payoffs are low, the growth option payoffs have high volatility, and the risk free discount rate is small. Also, present-biased managers are more likely to exercise abandonment option late when the net payoffs from continuing the project are high, salvage value of the project is low, and the rate of change in the salvage value over the period of time is low. In addition, present biased managers are more likely to exercise a growth option early in its life when the project is performing well. We provide implications for practice and IT governance

Applying Real Options Theory in the Electrical Energy Sector

Real options theory is the newest expansion of standard investment evaluation methods and one that is at the same time suitable for eliminating most of their inadequacies. Similarly to financial options, the possession of real options –rights not obligations – means that operational or production hedge mechanisms complementing the management tool-kit with flexibility and the capability to respond to the environment are acquired by means of interpreting options inherent to financial products for physical assets. This study aims to analyse how real options took root in investment evaluation theory, along with the types of real options and the valuation procedures available for them, moreover to illustrate real options analysis in the course of individual level investments in the electrical energy sector. By describing binomial pricing as completed for 10 power generation technologies in detail, my goal was not primarily to grasp strategic value identified through real options, much rather to describe the pricing steps themselves. Based on the results, real options theory outperforms conventional investment valuation procedures both in terms of uncertainty and managing flexibility

Aplikace metod reálných opcí při ocenění společnosti BAIDU

Import 22/07/2015In an uncertain environment, the firm’s ability to manage projects over time is valuable. The real options framework recognizes this value, and so represents a new approach to both project evaluation and strategic management [Barnett, 2005]. In this diploma thesis, we adopted real options method to evaluate asset values of Baidu with different flexibilities in 2013. Baidu is a leading company in Chinese internet search engine market, with the strongest technology and the best development teams in the industry.In an uncertain environment, the firm’s ability to manage projects over time is valuable. The real options framework recognizes this value, and so represents a new approach to both project evaluation and strategic management [Barnett, 2005]. In this diploma thesis, we adopted real options method to evaluate asset values of Baidu with different flexibilities in 2013. Baidu is a leading company in Chinese internet search engine market, with the strongest technology and the best development teams in the industry.154 - Katedra financívýborn

The application of real options to renewable energy investments in South Africa: the case of solar energy technology for small businesses and individual homeowners

There is a growing interest in renewable energy generation projects due to environmental and sustainability concerns. However, initial costs and uncertainties caused by a number of factors can render renewable energy projects unattractive when subject to conventional financial assessment. The overall benefits of renewable energy technologies are often not well understood and consequently are often evaluated to be less effective than traditional technologies. From the moment that the energy sector abroad started a deregulation process, with a high level of competitiveness and associated increased market uncertainty, traditional evaluation techniques became insufficient to properly deal with these additional risk and uncertainty factors. Consequently, the way investors evaluate their investments require more sophisticated evaluation techniques. Initial research suggests that the value of renewable energy projects can be enhanced by the application of real options theory. In addition to revealing the benefits that renewable energy projects provide when employing real options, analytical results indicate that real option analysis is a highly effective means of quantifying how policy planning uncertainty, including managerial flexibility, influences renewable energy development. However, real option literature regarding renewable energy generation projects is limited and the theory requires further development to take advantage of more flexibility value within renewable energy projects. Literature is particularly limited in terms of small businesses and individual homeowners and worthy of analysis. This study attempts to address this issue. This study shows that real option analysis is useful, in the face of numerous uncertainties, in assisting South African homeowners and small businesses in the six largest metros and Eskom when considering an investment in a solar PV system. Within these six metros and Eskom three different tariff structures are offered, some of which encourage such investments while others don’t, thus forcing the latter to purchase expensive battery systems and consequently making the investment somewhat ineffective. Investments in solar PV systems are relatively costly and so, before committing, one needs to be certain that the system will be cost effective. In this study, it is shown that there is strong evidence that real option analysis is, not only useful in determining whether such an investment is cost effective, but also in assisting with the timing of such investments. This could be crucial for success. The findings of this study have theoretical implications in terms of the efficiency of real option analysis in the South African energy sector, and thus provide a contribution to real option literature in this sector. They also have practical insights for investors, both homeowners and small businesses in the South African context, who are looking to invest in a solar PV system. The study starts with an introduction and background to energy generation and then presents a literature review concentrating on the use of real options as an appropriate valuation method for renewables. Thereafter, the hypothesis is stated and the data sample and research methodology discussed. One of the limitations of this study was the unreliable data and the difficulty finding it, which could give rise to self-selection bias. Finally, the results and a brief analysis are presented and then, in conclusion, there is a discussion on the limitations of the study and suggestions for further research

Examining Real Options Exercise Decisions in Information Technology Investments

Researchers have advocated real options thinking (ROT) for evaluating and managing risky IT investments to account for managerial decision flexibility. Effective ROT is a three-step process that requires managers to recognize, value, and exercise options embedded in IT projects. Prior research has illustrated the existence of managerial bias in the recognizing and valuing real options. However, little research has examined real options exercise decisions. Hence, we use prospect theory to examine whether IT managers demonstrate systematic biases while exercising real options in IT projects and portfolios. We also study whether one can control or mitigate such biases. We found evidence of biased (suboptimal) real option exercise decisions in IT projects and in IT portfolios. However, we found differences in biased decision making between a single project and a portfolio scenario. We also found that project scale and real option type influenced vulnerability of a project to biased decision making. In addition, simplifying the presentation of the net effects of real options exercise decisions can help reduce bias, especially for large project portfolios. We discuss the implications of these results on theory and practice

Astrazeneca and pharmaceutical industry: sector overview and company valuation

JEL classification: G30, G32The present Master thesis aims to present a global description of the pharmaceutical industry and evaluate AstraZeneca. Company valuation is followed by a recommendation on the stock and a target price. Pharmaceutical industry has several unique features, due to its impact on public health. Those features will be assessed by analyzing the industry worldwide and by describing European pharmaceutical companies. AstraZeneca is a British multinational that operates in the pharmaceutical sector. The company is responsible for all the process of investigation, development, testing, production, advertising and selling of own medicines. The company develops its R&D activities in oncology, cardiology, gastrointestinal, infection, neuroscience, respiratory and inflammation. Among the medicines best sellers are Nexium, Crestor, Symbicort and Brilinta. Company shares quote on London Stock Exchange, Stockholm Stock Exchange and on New York Stock Exchange. It integrates FTSE 100 and OMX 30 country indices. Company valuation has been performed, using fundamental analysis, by the Discounted Cash Flow method and the Multiples method. Regarding the valuation of the company, historical data publically published from 2009 until 2014 was used. The forecasting period is 5 years, from 2015 to 2020. After evaluating the company, we conclude that the recommendation is HOLD, with a target price of ₤46.98.A presente projecto de Mestrado tem como objectivo a apresentação de uma descrição global da indústria farmacêutica e a avaliação da AstraZeneca. A avaliação da empresa será seguida de uma recomendação de investimento, baseada no cálculo do preço-alvo da acção. A indústria farmacêutica tem um conjunto de características únicas, devido ao seu impacto na saúde pública. Essas características irão ser avaliadas através da análise da indústria a nível mundial e através da descrição de empresas europeias do sector farmacêutico. A AstraZeneca é uma empresa multinacional inglesa, que opera no sector farmacêutico. A empresa é responsável por todo o processo de investigação, desenvolvimento, teste, produção, divulgação e venda de medicamentos próprios. Desenvolve investigação nas áreas de oncologia, cardiologia, gastrointestinal, infecção, neurociência, doenças respiratórias e inflamação. Entre os medicamentos mais vendidos destacam-se Nexium, Crestor, Symbicort e Brilinta. A empresa está cotada na Bolsa de Londres, na Bolsa de Estocolmo e na Bolsa de Nova Iorque. É parte integrante dos índices FTSE 100 e do OMX 30. A avaliação da empresa foi feita através do Método de Fluxo de Caixa Descontado e do método dos Múltiplos. No sentido de avaliar a empresa, dados históricos entre 2009 e 2014, foram utilizados. A projecção dos resultados foi feita por um período de 5 anos, de 2015 até 2020. Através da avaliação feita concluímos que a recomendação é MANTER, com um preço-alvo de ₤46.98

Taxation, R&D tax incentives and patent application in Europe

The focus of this paper is on effects from tax incentives for research and development inputs (R&D) and corporate income tax on business R&D and patenting behaviour. First, we provide a theoretical discussion of tax planning with R&D and intellectual property (IP) ownership. Further, we employ firm-specific micro-data on patent applications of European corporations at the European Patent Office to test reactions on changes in R&D tax incentives and corporate tax burden. We find a positive impact of R&D tax incentives and a negative impact of the statutory corporate income tax rate on patenting. R&D incentives rather influence the tendency to invest in R&D, whereas the tax burden rather influences the scale of R&D investment and the count of patent applications. --Patent,R&D,Tax Incentives,Taxation,EU