July 2009
Intermediate to advanced
600 pages
19h 50m
English
book
The Dark Side of Valuation: Valuing Young, Distressed, and Complex Businesses, Second Edition
by Aswath Damodaran
Content preview from The Dark Side of Valuation: Valuing Young, Distressed, and Complex Businesses, Second Edition
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The Essence of Real Options
To understand the basis of the real options argument and the reasons for its allure, it is easiest to go back to the risk-assessment tool unveiled in Chapter 3—decision trees. Figure 5.1 shows a simple example of a decision tree.
Figure 5.1. Simple Decision Tree
Given the equal probabilities of up and down movements, and the larger potential loss, the expected value for this investment is negative:
| Expected Value = 0.50 (100) + 0.5 (–120) = –$10 |
Now contrast this with the slightly more complicated two-phase decision tree shown in Figure 5.2.
Figure 5.2. Two-Phase Decision Tree
Note that the total potential profits ...
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