Laura Martin: Real Options and the Cable Industry Case Solution & Answer

ii).

If FCC is required to relinquish 1.5% over the period of 5 years for the time period after five years from now, then again the up movement and the down movement of the asset prices would be impacted and this we have modelled but only for the last five years of the model. In other words, we are again changing the implied volatility, but this time we are changing the implied volatility for the last 5 years which is the time ahead of five years from today. The new inputs could be seen in the excel spreadsheet. Based on this assumption, the new real option price would be $ 20.84. The tree part that is affected by this assumption has also been highlighted which is shown in the tables below:

 

Â	Now	Â	Â	Â	Â	Â	Â	Â	Maturity
Period	0	1	2	3	4	5	6	7	8	9	10
Time	0.000	1.000	2.000	3.000	4.000	5.000	6.000	7.000	8.000	9.000	10.000
Asset Tree	$23.15	$34.20	$51.31	$76.96	$115.44	$173.16	$257.14	$381.85	$567.05	$842.07	$1,250.48
		$11.92	$17.88	$26.83	$40.24	$60.36	$89.63	$133.10	$197.65	$293.51	$435.87
			$6.14	$9.21	$13.81	$20.72	$30.77	$45.70	$67.86	$100.77	$149.65
				$3.16	$4.74	$7.11	$10.57	$15.69	$23.30	$34.60	$51.38
					$1.63	$2.44	$3.63	$5.39	$8.00	$11.88	$17.64
						$0.84	$1.25	$1.85	$2.75	$4.08	$6.06
							$1.26	$1.87	$2.77	$4.12	$6.12
								$0.64	$0.95	$1.41	$2.10
									$0.96	$1.43	$2.12
										$0.49	$0.73
											$0.74
Call Option Tree	$20.84	$33.31	$50.41	$76.01	$114.44	$172.11	$256.04	$380.69	$565.83	$840.85	$1,249.26
		$7.55	$16.88	$25.88	$39.24	$59.31	$88.53	$131.94	$196.43	$292.29	$434.65
			($2.79)	$8.02	$12.82	$19.68	$29.67	$44.54	$66.64	$99.55	$148.43
				($16.09)	$3.19	$6.07	$9.46	$14.53	$22.08	$33.38	$50.16
					($41.11)	$0.09	$2.53	$4.23	$6.78	$10.66	$16.42
						($95.36)	($2.94)	$0.69	$1.53	$2.86	$4.84
							$0.43	$0.82	$1.55	$2.90	$4.90
								$0.00	$0.00	$0.19	$0.88
									$0.00	$0.21	$0.90
										$0.00	$0.00
	Â										$1,248.04

Part c).

i).

We have increased the PV of the potential project per home passed based on the increase in the capacity of the signals of Cox by 0.75% per year due to the proprietary technology. The new PV of the potential project per home passed is computed to be $ 24.89. Using this, new value of the real option has increased and it is around $ 24.08. The 10 step binomial tree is shown in the table below:

Â	Now	Â	Â	Â	Â	Â	Â	Â	Maturity
Period	0	1	2	3	4	5	6	7	8	9	10
Time	0.000	1.000	2.000	3.000	4.000	5.000	6.000	7.000	8.000	9.000	10.000
Asset Tree	$24.89	$37.33	$55.99	$83.99	$125.99	$188.98	$283.47	$425.20	$637.81	$956.71	$1,435.07
		$36.09	$54.13	$81.19	$121.79	$182.68	$274.02	$411.03	$616.55	$924.82	$1,387.23
			$52.32	$78.49	$117.73	$176.59	$264.89	$397.33	$596.00	$893.99	$1,340.99
				$75.87	$113.80	$170.70	$256.06	$384.09	$576.13	$864.19	$1,296.29
					$110.01	$165.01	$247.52	$371.28	$556.92	$835.39	$1,253.08
						$159.51	$239.27	$358.91	$538.36	$807.54	$1,211.31
							$231.30	$346.94	$520.42	$780.62	$1,170.93
								$335.38	$503.07	$754.60	$1,131.90
									$486.30	$729.45	$1,094.17
										$705.13	$1,057.70
											$1,022.44
Call Option Tree	$24.08	$36.48	$55.10	$83.05	$124.99	$187.93	$282.37	$424.05	$636.59	$955.49	$1,433.85
		$35.23	$53.23	$80.25	$120.79	$181.63	$272.92	$409.87	$615.33	$923.60	$1,386.01
			$51.43	$77.54	$116.73	$175.54	$263.79	$396.17	$594.78	$892.77	$1,339.77

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