Summary Economics of strategy
Market value
Market value=Market capitalization( P)=NPV + PVGO
P=Stock price∗number of stocks outstanding
Tobin ’ s q=P /book value of equity=Market value /Book value
Different methods of analysis
NPV-analysis Cost and benefit when firm is viewed in isolation
Option value Flexibility value when firms can adjust to changes in the market
IO/game theory Strategic position in the market
NPV adjusted for uncertainty: Decision trees
You use NPV when a project is reversible
You use Real option analysis when a project is irreversible
, Options
= for Uncertain situations
Exercise prize = the price of the deal
the lower price you pay for a share when using your call option
the higher price you receive for a share when selling your put option
Expanded NPV =NPV +Option value
1. Timing option: value of waiting to invest / to defer
- Invest now or next year?
- American
2. Growth option: R&D
- Invest potentially in a later because there’s high uncertainty
- European
3. Operating options
- Operating options: Option to Abandon production capacity
Market value
Market value=Market capitalization( P)=NPV + PVGO
P=Stock price∗number of stocks outstanding
Tobin ’ s q=P /book value of equity=Market value /Book value
Different methods of analysis
NPV-analysis Cost and benefit when firm is viewed in isolation
Option value Flexibility value when firms can adjust to changes in the market
IO/game theory Strategic position in the market
NPV adjusted for uncertainty: Decision trees
You use NPV when a project is reversible
You use Real option analysis when a project is irreversible
, Options
= for Uncertain situations
Exercise prize = the price of the deal
the lower price you pay for a share when using your call option
the higher price you receive for a share when selling your put option
Expanded NPV =NPV +Option value
1. Timing option: value of waiting to invest / to defer
- Invest now or next year?
- American
2. Growth option: R&D
- Invest potentially in a later because there’s high uncertainty
- European
3. Operating options
- Operating options: Option to Abandon production capacity
