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Valuation of Ilania Market Options : APPENDIX 7

Decision Tree & Black Scholes
(all figures S$ millions)

7.1 Decision Tree

80% Chance of 240,000 (EV = 192,000)

196,800
20% Chance of 24,000 (10% * 240,000)
(EV = 4800)

Undefined costs (2000)

99,348 = 51% * 194,800

Sell if indigenisation/political risk worsens (Net): 0

70% Chance Ilania complies (EV = 69,544) 67,200
79,520 - 2140 (EV =77,380) 20% Chance of 240,000 (EV = 48,000)

30% Chance Ilania fails 33,252 = 51% * 65,200 80% Chance of 24,000 (EV = 19,200)
(EV = 9,976) Undefined costs (2000)
Strategy 1 Buy extra 2% (2140)
Sell if indingenisation/political risk worsens (Net): 0
Strategy 2 3 -Sell outright for Net 73,018 or 100,000

Strategy 3: Stay the course

70,042
EV = 63,690
70% Chance Ilania complies: benefit 90,985

30% Chance Ilania fails -Exercise Abandon/Sell/Put Option: 21,172 (28,000 div 1.15^2
EV 6,352
SUMMARY
STRATEGY 1 STRATEGY 2 STRATEGY 3 STRATEGY 3
Consolidate & Stay course Sell-off: Option 1 Sell-off: Option 2
expand (With PUT OPTION) (CASH OFFER) (SHARE OFFER)
(with CALL OPTION)
Expected NPV (before 77,380 70,042 73,018m 100,000
Call/Put Option)
Option values 6609 49 -

EXPECTED NPV 83,989 70,091 73,018m 100,000

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