How might this explain the high valuations of many start-up high-tech companies that have yet to show positive earnings?

Jump to Answer Section
Category:

How might this explain the high valuations of many start-up high-tech companies that have yet to show positive earnings?

Assume you have just been hired as a financial analyst by Tropical Sweets Inc., a mid-size California company that specializes in creating exotic candies from tropical fruits such as mangoes, papayas, and dates. The firm’s CEO, George Yamaguchi, recently returned from an industry corporate executive conference in San Francisco, and one of the sessions he attended addressed real options. Because no one at Tropical Sweets is familiar with the basics of real options, Yamaguchi has asked you to prepare a brief report that the firm’s executives can use to gain a cursory understanding of the topic.
 
To begin, you gathered some outside materials on the subject and used these materials to draft a list of questions that need to be answered. Now that the questions have been drafted, you must develop the answers.
 
What happens to the value of the growth option if the variance of the project’s return is 0.142? What if it is 0.50? How might this explain the high valuations of many start-up high-tech companies that have yet to show positive earnings?

Answer & Explanation (1)

Explanation

The actualization of the real options in business will create more opportunities for the company in the competitive market. This idea will greatly satisfy the customer needs in the market as well as controlling the larger global market. The idea ventures into new business avenues in the company aimed at creating economic value for the company. The economic value of Tropical Sweet Inc. is likely to rise with actualization of the new real options (Jagtian, 2012). More job opportunities will be available for new employees as the company tends to expand and capture a larger global market. New products will meet the customer needs in the market. The value growth option increases with lower variance option. This implies that with lower variance there is less impact on the business growth. On the other hand, the higher variance in the return option implies greater impacts on the business. The variance has a significant impact on high tech business implementation (Hemmert, 2004). This usually requires strategic balancing of the variance return option to maximize on the business return.

Purchase answer to view it. $5

Login/register for free and load your wallet instantly with $5 to buy and view this solution.

Category: