Commercial Engineers & Body Builders Co Ltd: Valuation of New Plant Using Real Options Technique

Abstract:

Commercial Engineers and Body Builders Co. Ltd (CEBBCO) was founded in 1979 to manufacture commercial vehicle bodies and body components. The company expanded its business rapidly and in the financial year 2008-2009, entered the market to produce wagons and coaches for the Indian Railways. To fund the new plant in Madhya Pradesh, the company came up with an Initial Public Offer (IPO). In the face of analysts’ conflicting views, the case deals with determining the expected value of the business through the traditional discounting techniques, binomial Lattice techniques, and closed form solutions, keeping in view the risk attached to this form of business.

Issues:

» Understand valuation of a new project with Discounted Cash Flow (DCF) Mechanism.
» Interpret and justify the Internal Rate of Return and Risk Free Rate Return from the project.
» Analyze the riskiness of the project vis-à-vis its competitors.
» Calculate the value of the project with Binomial Lattice Techniques and Closed-form Solutions.
» Discuss and debate the merits and drawbacks of Discounted Cash Flow, Black-Scholes Method, and Real Option Strategy to find the viability of a New Project.

Contents:

Keywords:

Real Option, Black-Scholes method, Binomial lattice model, Closed form solution model, Internal Rate of Return (IRR), Net Present Value (NPV), Return on Net Worth (RNOW), Risk Free Returns, Discounted Cash Flow (DCF), Commercial Engineers and Body Builders Co. Ltd, Strategic Finance Management, Project Management, Financial Management

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