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Growth Options Management

growth Options Management

less important in periods of tight capital because directional factors take precedence. If two investment opportunities have identical NPVs and can be deferred for the same amount of time, the riskier of the two projects will be a more valuable growth option. Publication: South Asian Journal of Management, volume/issue: Vol. This analogy was first drawn by Stewart Myers in Determinants of Corporate Borrowing, Journal of Financial Economics,. In fact, existing cures for quantitative shortcomings may be worse than the disease.

Exhibit III shows how a company should time the exercise of its growth options based on the extent of industry rivalry and on the exclusiveness of a companys right to exercise the options. Risk dimensions The second prong of the framework focuses on the strategic risks associated with each of the growth options. Although there are still opportunities to grow the current business model in this region, the market is becoming saturated. Three years is a good rule of thumb used by many expanding businesses. You must be realistic and practical when setting growth objectives. This can give certain kinds of projectsspecifically, those that create new growth optionsa crucial comparative advantage in the capital budgeting process. Mergers and acquisitions are more suited to established enterprises and transactions involve commercial lawyers and considerable legal work. Even if you're happy with your current performance, it's important to keep looking for ways to develop. Businesses involved with complementary activities or skills are usually the most appropriate candidates. Does it matter whether a company owns a growth option exclusively as a collective option of the industry? But by giving a company the right to time the investment more selectively, the growth option provides an important, though often overlooked, motive for dominating the market. What advantages do you have over your rivals that may attract their customers?

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