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Multiple Choice Quiz
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1
In terms of real options, the cash flows from the project play the same role as:
A)Stock prices
B)Dividends
C)Option delta
D)Exercise price
2
The opportunity to defer investing to a later date may have value because:
A)The cost of capital may decline in the near future
B)Uncertainty may be reduced in the future
C)Investment costs fluctuate in time
D)Market conditions may change and increase the NPV of the project
3
Option pricing models represent an enhanced version of what capital investment decision tool?
A)NPV
B)IRR
C)Payback
D)ROI
4
Which of the following is not a challenge of applying real-options analysis?
A)Real options can be complex
B)Real option analysis does not use DCF
C)Real options lack structure
D)Real options interact with those of competitors
5
On which market do real options trade?
A)CBOE
B)NYSE
C)NASDAQ
D)None of these options
6
An example of a real option is:
A)The option to make follow-on investments
B)The option to abandon a project
C)The option to wait before investing
D)All of these options
7
The option to wait before investing is equivalent to
A)Selling a put option
B)Selling a call option
C)Owning a put option
D)Owning a call option
8
A rational manager may be reluctant to commit to a positive NPV project when:
A)The value of the option to abandon is high
B)The exercise price is high
C)The opportunity cost of capital is high
D)The value of the option to wait is high
9
Production facilities that are flexible in terms of possible raw materials used are most valuable when:
A)Product demand is highly volatile
B)Product price is highly volatile
C)Raw material prices are highly volatile
D)Labor costs are highly volatile
10
A real estate developer who buys an option on farm land is exercising the right to
A)Abandon a project
B)Make a follow up investment
C)Wait and invest later
D)Sell when the price gets high
11
The owner of a pro team that wants to find a buyer, should she not get a new stadium, might be interested in a option that provides the right to
A)Abandon a project
B)Make a follow up investment
C)Wait and invest later
D)Sell when the price gets high
12
If a firm buys 20 airplanes and then has the option to get a discount on future purchases, they have an option to
A)Abandon a project
B)Make a follow up investment
C)Wait and invest later
D)Sell when the price gets high
13
A manager estimates the NPV of a project to be −$10 using DCF. She also identifies an expansion option, which is valued at $20. What is correct number to use when deciding whether to go forward with the project?
A)−10
B)+10
C)+20
D)+30
14
Once exercised, what happens to the value of a real option?
A)It decreases.
B)It increases.
C)It might increase or decrease.
D)It stays the same.
15
What is the first step in determining abandonment value?
A)Assign probabilities to outcomes
B)Forecast cash flows well beyond the project's expected life
C)Assess a default risk component
D)Determine the put or call position being valued.





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