summary - EoS - Economics of Strategy (Grade: 9,8/10)

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