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Options and Corporate Finance

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Ethan Miller/Getty Images, Inc.; Getty Images, Inc.; Barry Sweet/ZUMA Press/©Corbis

Learning Objectives

image Define a call option and a put option, and describe the payoff function for each of these options.

image List and describe the variables that affect the value of an option. Calculate the value of a call option and of a put option.

image Name some of the real options that occur in business and explain why traditional NPV analysis does not accurately incorporate their values.

image Describe how the agency costs of debt and equity are related to options.

image Explain how options can be used to manage a firm's exposure to risk.

Sometimes even the most carefully laid business plans must be changed. This fact was especially apparent in Las Vegas, Nevada after the U.S. economy went into a recession in December 2007. A comparison of the decisions and outcomes at three casino/hotel/condo ...

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