Page 29 - MCOM MODEL ANSWER 1

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Strategy 2 -

Stay the course at 49% -Option to abandon/sell (Put Option) embedded

Dividend cash flows (growth (g) = 9%, Cost of equity (Ke) = 15%) [ PV = D1(1+g )/ ke-g ; where D1 = Do (1+g)

Do = December 31, 2015 Growth Rate December 2016 December 2017 December 2017+
5008 g = 9% 5459 5950 6486
PV Div by 1.15 Div by 1.15^2 Div by 6%i.e (Ke-g))
PV 4747 4499 108,100
PV of dividend cash flows 9246 Div by 1.15^2
2016/2017
PV of post 2016 Dividend Cash 81,739 81,739
flows
PV of dividend cash flows 90,985

Value of Put Option (See below) 49
Value of Option 2 before 70/30% 91,034
probabilities are considered.

But the above dividend stream has an Abandonment Real Option (Put Option, i.e. 'the right but not the
obligation to sell') which can be estimated using the BSF. MCOM can only know if Ilania fully complies in
2 years time i.e. at the end of 2017 and there is an offer to sell at that stage for 28,000. This offer
becomes the exercise price (Pe), in terms of the BSF. Meanwhile the Present value (Pa) of the asset, i.e.
MCOMs investment in JV-Cellular will be the Present Value of all dividends it has to forgo if it accepts this

offer at that stage, being 81,739 as calculated above. So to value this Put Option using BSF:

Pa Pe t s r e^-rt
81,739 28,000 2 Years 0.25 0.05 0.779

d1 = [In(81,739/28,000) + (0.05 + 0.5 * 0.25^2) * 2] / (0.25 * V5
= {1.0713 + 0.1625}/0.5590
= 2.2100

d2 = 2.2100 - 0.5590
= 1.6500

N(d1) = 0.5 + 0.4865 = 0.9865
N(d2) = 0.5 + 0.4505 = 0.9545
Call (Option to Expand) = (81,739 * 0.9865) - (28,000 * 0.9545 * 0.9048)

= 80,636 - 24,182
= 56,454
Put Value = 56,454 - 81,739 + 28,000 * 0.9048

= 49
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