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Casa Analysis

894 words - 4 pages

WHEN TO ISSUE THE NONVOTING CLASS A STOCK

MLCM believed that market condition would deteriorate further during the week of October 5, and strongly recommended that Spiegel price the Class A shares in the next 48 hours or postpone the offering indefinitely. Now whether MLCM was right or not it will be judged by real option valuation. We showed the decision analysis by using both the FCF and the net cash flow. We have used three options such as a. Timing option, b. Decision Tree Analysis, and c. Option to Wait (Black Scholes Model).

|1. Timing Option |

We have used Timing Option to calculate the NPV if the stocks were issued immediately. Here we consider FCF in the ...view middle of the document...

66 |
| |30% | | |
| |40% |Average |466399.36 |
| |30% | | |
| | |Low |0 |
|E(NPV) |368974.04 |

If the company issued the stock one year later expected net present value from the issue would be less (only $368794.04) than that of immediate issue ($526734.24). So the company should issue the securities immediately.

|3. Option To Wait |

Here we have used Black-Scholes Model to show the value if the company postponed the issuance today and waited for future.

|Current Price (S) |431222.45 |
|Exercise Price (X) |6120 |
|RFR |0.0622 |
|T |12 months |
|Variance |0.0688 |
|SD |0.2622 |
|d1 |16.59352702 |
|d2 |16.3312772 |
|C0 |$425,471.52 |

Both the Decision Tree Analysis and the Black Scholes Model say that the stock should be issued immediately.

Then we will consider cash flow for the three models again.

|1. Timing Option |

|Demand |Probability |Annual CF |E(NPV) |
|High |30% |4094.57 |13798.05334 |
|Avg |40% |3149.67 |9201.57949 |
|Low |30% |2204.77 |4605.105643 |

|2. Decision Tree Analysis |

|0 |Probability |Cost |Future Cash Flow |
| | | |  |
|  |  |1987 |1988 |
| |  |High |608047.66 |
| |30% | | |
| |40% |Average |466399.36 |
| |30% | | |
| | |Low |0 |
|E(NPV) |6692.23 |

|3. Option To Wait |
|  |

|Current Price (S) |12399.28 |
|Exercise...

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