Submitted by: Submitted by keesha357
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Pages: 13
Category: Business and Industry
Date Submitted: 02/09/2013 04:49 PM
Keesha Coaxum
Use of Real Option Theory in Financial Management
Ashford University
BUS650: Managerial Finance
Instructor Cain
January 13, 2013
In business, as in comparison to life, you find yourself deciding on options or making decisions that can affect your live and the lives of others financially. In today's unstable market, managers realize how incredibly risky some investment opportunities can be and how useful a flexible strategy can become implemented. Using real options theory, managers can effectively analyze opportunities to pursue, delay, modify, or abandon projects as events unfold like in today’s economy with the fiscal cliff.
This paper analyzes the use of real option theory in financial management and modeling. It discusses issues included in the implementation of the theory in financial management and modeling. It explains new learning in real option theory and a case study that was able to apply the theory along with the application of the theory to my former employment which has helped me understand real option theory.
Use of Real Options Theory in Financial Management/Modeling
The Real Option Theory has struck some interest with managers in the last couple of decades. Back in the day, companies had plenty of time to make decisions to make changes when they felt it was necessary. Now, if they take their time deciding on changes, chances are by the time they finally make a decision, another company has already made the move. Times have
changed with how the economy is today; the old saying, “It’s a Dog Eat Dog World”, and in this competitive market, you have to make moves quickly and strategically to survive as a company. The Real Option Theory has helped gather concepts from financial economics and use them to make better decisions.
The Real Option theory is different from other theories as it shows the combined importance of uncertainty and managerial discretion in a company which gives a broad view of a company’s...