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Provides a basic understanding of real options in corporate finance. Traditional discounted cash flow techniques (NPV) do not deal well with managerial flexibility or future response to uncertainty. The value of this flexibility can be significant and is handled well by option-pricing techniques. A description and taxonomy of real options is followed by several examples of valuing and using real options to make better value-enhancing decisions.

Spreadsheet Supplement for case 294109

Documents a pricing anomaly in the large and liquid treasury bond market. The prices of callable treasury bonds seem to be inconsistent with the prices of noncallable treasuries and an arbitrage opportunity appears to exist. Permits instructors to introduce the treasury market, the concept of creating synthetic instruments, principles of arbitrage, and institutional frictions in the bond markets.

Spreadsheet Supplement for case 293093

A manager of a small investment company has been successfully using index funds for limited market timing. Growth has allowed her to move into picking stocks. She is considering two small and highly variable listed stocks, but is concerned about the risk that these investments might add to her "portfolio." Provides a lead-in to the CAPM. Students learn about total risk, non-diversifiable or portfolio risk, and (CAPM) beta, and calculate variability of the stocks separately, and portfolio variance with and without the stocks, to see how an extremely risky (but low-beta) stock actually reduces risk; and calculate stock betas.

Spreadsheet supplement for case 292122.

A set of five exercises in capital budgeting. Student calculates and compares various decision criteria (including IRR and NPV) for capital investment projects. This is an introductory case, where relevant cash flows are provided, and the focus is on the discounting mechanics and the decision to invest. In addition, one exercise directly probes the link between positive NPV projects, and value added to the shareholders. The final "exercise" is a three page mini-case analyzing Lockheed's decision to invest in the TriStar L-1011 Airbus project. This drives home the importance of discounting and NPV, and shows the adverse effect of a negative NPV project on shareholder value.

Spreadsheet supplement for case 291-031.

A set of five exercises in valuation of simple fixed income securities. No capital budgeting. Students use present value analysis to compute discounted cash flows. Situations/concepts covered include: future value; mortgage payment and repayment; calculating implicit interest rate on loan, yield to maturity on bond; bond pricing, to include rate sensitivity, Eurobonds, conversion of bond-equivalent yield to effective annual yield, and Japanese yields; growing versus fixed retirement annuities.