Real Options Analysis. An application to the Steel Industry: The Application of Real Option Thinking

Mashamba, Tafirei, Magweva, Rabson

ISBN 10: 3659300233 / ISBN 13: 9783659300233

Published by LAP LAMBERT Academic Publishing, 2013

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Bibliographic Details

• Title: Real Options Analysis. An application to the Steel Industry: The Application of Real Option Thinking
• Publisher: LAP LAMBERT Academic Publishing
• Publication Date: 2013
• Language: English
• ISBN 10: 3659300233
• ISBN 13: 9783659300233
• Binding: Paperback
• Condition: Like New
• Book Type: book

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Synopsis

Over the years, the DCF approach has been the valuation choice of many practioners, academics and corporate finance managers. Such valuation techniques include the NPV, IRR and Payback. The former is widely employed due to its intuition and easy computation. Under this approach a project’s worthiness is derived from its projected cashflows discounted at the appropriate discount rate (normally the WACC). Projects with positive NPVs are accepted whilst those with negative NPVs are rejected. However, this technique does not tell us what to do next after accepting or rejecting a project. Furthermore the choice of the discount rate is conceptually flawed. What is the most appropriate discount rate for each project? These shortcomings of DCF models are addressed by the Real Option Valuation. This research employed the BOPM to value a steel plant. Two embedded options were identified namely the abandonment and expansion options. The research concluded that apart from DCF valuation techniques being currently employed by the firm they can as well incorporate Real Options Analysis to decision making. Such actions if accurately valued and timely executed do add firm value.

About the Author

Tafirei Mashamba is a lecturer at Great Zimbabwe University in the Department of Banking & Finance.He holds an Msc degree in Finance & Investments (NUST)and a BCom degree in Banking & Finance (GZU).He is an affiliate member of the Institute of Bankers Zimbabwe (IOBZ).His areas of interest are Real Options Analysis & Valuation and Corporate Finance.