The Right of Acquisition: Options in Commercial Real Estate Case Harvard Case Solution & Analysis

The Right of Acquisition: Options in Commercial Real Estate Case Study Help

What additional assumptions were necessary for this estimation?

There is a number of assumptions which have been used for the purpose of calculating the value of the option. The assumptions for valuation of the option lease, are provided below:

  1. The risk free rate of return is assumed to be 2%, which means that the investor would expect the interest of 2% from the absolutely risk free investment over the specified period of time.
  2. The volatility in the price of the lease is assumed to be 20 percent.
  3. The dividend yield is assumed to be 8.23 percent.
  4. The rate of inflation is assumed to be 2 percent.
  5. In addition, the expected return on the Kelley building is assumed to be 9.5 percent, which was previously estimated by the Nichols by taking anaverage of the historical return on an annual basis.

Conclusion

Taking into consideration the certain assumption generated for an accurate and reliable valuation of the option lease and estimation of the property’s price;it is analyzed that the value of the option should be $904927 instead of the value of the lease calculated by Nichols i.e. $113449. It is because of the fact that the traditional discounted cash flow model does not take into account the variation in the price of the property or the rate of volatility....................................

 

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