Master's thesis ppp

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The PowerPoint slides prepared to present the Master's thesis project in Business Administration

Text of Master's thesis ppp

  • 1. Barking up the right tree: binomial optionvaluation of investments in steel making A case study of Metals and Polymers*Masters thesis presentation 01/06/2012Author: Dmytro SerebrennikovSupervisor: Luca Di Corato *www.metipol.com
  • 2. The object of case study: Metals and Polymers Ltd Established in 2008 Alchevsk, Eastern Ukraine Produces galvanized and polymerized steel Total capacities 175 000 tons of output annually Investment capital (pilot stage) $72 mln Future decisions (options) depend on market conjuncture: Output prices go up: expansion to 300 000 tons Investment capital (expansion stage) - $65 mln Output prices fall / risk of expropriation: abandonment Assets can be sold at $65 mln
  • 3. The object of case study: Metals and Polymers Ltd
  • 4. Research questions: 1) How will the options to expand and to abandon affect the value of the factory if both of them are implemented separately and together? 2) How will the value of the factory and the values of the embedded options change in response to changes in key variables: rate of corporate tax, discount rate and volatility?
  • 5. Method Positivistic approach: the validity of the numerical model used is tested Data collection: - primary info is derived from financial statements - it is delivered in a pre-structured form suitable for the theoretical model selected (Excel sheet-integrated) - interview is arranged to make clear contextual details Data analysis: Microsoft Excel
  • 6. Theoretical framework Net Present Value (NPV) analysis Option valuation model Time series analysis
  • 7. NPV analysis: present value (PV) of a business FCF free cash flow n number of time periods r discount rate t concrete time period rate of growth
  • 8. NPV analysis: Free Cash Flow (post tax cash flow)
  • 9. NPV analysis: discount rate (r) and rate of growth ( ) Three discount rates are chosen to plug in the model:1) r = 6,75% - value of a coupon attached to a default-free governmental bond (EUROBOND-2017)2) r = 9,5% - offered by the firms analysts3) r = 13% - selected arbitrarily to complete the interval Rate of growth = 3% - rate of drift for polymerized steel
  • 10. NPV analysis: extended NPVOption (in real economy ) an opportunity to change the course of business inresponse to market signals Types of options : option to expand option to abandon option to switch option to delay
  • 11. Option valuation theory: originOption (financial instrument) a right, but not an obligation tobuy/sell some amount of stock (shares of a company)
  • 12. Option valuation theory: origin Variables comparison Notation Financial option Real option S Price of stock Market value of assets K Exercise (strike) price Value of investment capital t Expiration time Last time to invest in a project r Discount rate Discount rate Volatility of stock Volatility of output prices
  • 13. Option valuation theory: Binomial lattice (tree)Two-state assumption: price of stock (asset) moves either up or down year 0 year 1 year 2 4) 2) 1) 5) 3) 6)
  • 14. Option valuation theory: Value of a call option year 0 year 1 year 2 4) 2) 1) 5) 3) 6)
  • 15. Option valuation theory: Evolution of the assets value Years 0 1 2 3 7 157 Asset value Expansion Wait/Abandon 4 135 Item Data Present value 100 Risk-free rate 5.00% 2 116 8 116 (volatility) 15% Upside jump (u) 1.161834 Downside jump (d) 0.860708 1 100 5 100 p (probability) 0.628613 1-p 0.371387 Cost of expansion 15.00 3 86 9 86 Expansion factor 1.20 Discount factor 1.05 Selling value 100.00 6 74 Results Options value 11.97 10 64
  • 16. Option valuation theory: Options to expand and abandon Years 0 1 2 3 7 157 Asset value 173 Expansion Wait/Abandon 4 135 Item Data 147 Present value 100 147.70 Risk-free rate 5.00% 2 116 8 116 (volatility) 15% 124 124 Upside jump (u) 1.161834 127.28 Downside jump (d) 0.860708 1 100 5 100 p (probability) 0.628613 104 1-p 0.371387 111.97 109.86 Cost of expansion 15.00 3 86 9 86 Expansion factor 1.20 88 88 Discount factor 1.05 101.14 100 Selling value 100.00 6 74 74 Results 100 Options value 11.97 10 0 Node 5:
  • 17. Time series analysis: measuring volatility
  • 18. Price 1050