(i) Describe the benefits and costs of delaying an investment opportunity. (ii) You are a financial.

(i) Describe the benefits and costs of delaying an
investment opportunity.

(ii) You are a financial analyst at Global Conglomerate and
are considering entering the shoe business. You believe that you have a very
narrow window for entering this market. Because of Christmas demand, the time
is right today and you believe that exactly a year from now would also be a
good opportunity. Other than these two windows, you do not think another
opportunity will exist to break into this business. It will cost you $35.2
million to enter the market. Because other shoe manufacturers exist and are
public

(i) Describe the benefits and costs of delaying an
investment opportunity.

(ii) You are a financial analyst at Global Conglomerate and
are considering entering the shoe business. You believe that you have a very
narrow window for entering this market. Because of Christmas demand, the time
is right today and you believe that exactly a year from now would also be a
good opportunity. Other than these two windows, you do not think another
opportunity will exist to break into this business. It will cost you $35.2
million to enter the market. Because other shoe manufacturers exist and are
public companies, you can construct a perfectly comparable company. Hence, you
have decided to use the Black-Scholes formula to decide when and if you should
enter the shoe business. Your analysis implies that the current value of an
operating shoe company is $40.4 million and it has a beta of 1.1. However, the
flow of customers is uncertain, so the value of the company is volatile-your analysis
indicates that the volatility is 25% per year. Twenty percent of the value of
the company is attributable to the value of the free cash flows (cash available
to you to spend how you wish) expected in the first year. If the one-year
risk-free rate of interest is 4.1%:

a. Should Global enter this business and, if so, when?

b. How will the decision change if the current value of a
shoe company is $35.6 million instead of $40.4 million?

c. Plot the value of your investment opportunity as a
function of the current value of a shoe company.

d. Plot the beta of the investment opportunity as a function
of the current value of a shoe company