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Enron Mail |
Haas Biotech Club, Haas Finance Club and
The Lester Center for Entrepreneurship are very proud to present Martha Amram? "What's Real About Real Options" Tuesday April 24th 2001 6:30 PM Wells Fargo Room Haas School of Business UC Berkeley Refreshments will be served ? ------------------------------------------------------------------ About the talk By Jacob Sagi, Assistant Professor of Finance, Haas School of Business Martha Amram is one of the leading advocates of the real options approach to asset valuation. The methodology originated as an economically sound way to calculate the value of an asset whose management requires sequential decision-making. For instance, a pharmaceutical company may wish to assess the value of a speculative research project that, after many stages, may result in a marketable drug. At each stage the company can decide to proceed along a number of routes: abandoning the project, moth balling it, or continuing on a variety of scales. Roughly speaking, the real options approach selects, from among a universe of possible sequential decision strategies, a single strategy that maximizes the present value of cash flows. The cash flows for each strategy are discounted for the risk that the strategy reflects and not by an ad hoc cost of capital discount factor. A real options approach to valuation is especially useful when one is trying to decide whether to defer investment in a project (analogous to deciding whether an American Call option should be exercised), or when an asset embodies latent value due to future growth possibilities (e.g., internet firms). Although academicians have long been proponents of the technique, there is still a great deal of skepticism among practitioners. This is largely due to the fact that "optimal" decisions reached via a real options approach are sensitive to input variables that are not always known reliably (e.g., the probability that a drug will be deemed successful in human trials). Regardless, a growing number of firms are opting for the methodology. This is evidenced by an increase in the number of consulting firms who employ or specialize in real options analyses. Tuesday's speaker, Martha Amram, is the author of an important book on the subject, "Real Options: Managing Strategic Investments in an Uncertain World," as well as recent articles in the Journal of Business Strategy, Harvard Business Review and Journal of Applied Corporate Finance. She has extensive consulting experience and is frequently invited to speak on the subject of real options. Although some in the business community have recently branded real options valuations a fad, academicians, like myself, would contend that the methodology is an important tool that is here to stay. I therefore encourage all students to come to the talk and learn more about the advantages and disadvantages of this much-talked-about concept. ?
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