Managerial flexibility using ROV : a survey of top 40 JSE listed companies
Date
2006-12
Authors
Mokenela, Lehlohonolo
Journal Title
Journal ISSN
Volume Title
Publisher
Stellenbosch : University of Stellenbosch
Abstract
For the last 40 years, academics advocated the use of the traditional Discounted Cash
Flow (DCF) techniques but these suggestions were ignored by practitioners for a long
time. The Net Present Value (NPV), Internal Rate of Return (IRR) and Present Value
Payback Period (PVPP) are now some of the more widely used traditional DCF-based
techniques, especially among large firms. However, academics are now criticising these
techniques as they are based on rigid assumptions that ignore the management of
flexibility in projects. The Real Option Valuation (ROV) is suggested as an alternative
technique because it implicitly incorporates this flexibility in project valuation. With
ROV, opportunities in projects are treated as real options and are therefore valued using
financial option principles. Real options give the firm the opportunity to act on an
investment project (invest, abandon, rescale) at a later date, when more information is
available.
As with the traditional DCF-based techniques in the past, few firms seem to have adopted
ROV despite academics’ recommendations. This study is thus aimed at determining
through a survey, whether the largest firms in South Africa, specifically those included in
the JSE/FTSE Top 40 index, are using ROV. Based on the results of the survey, it is
concluded that firms generally do not use ROV as only nine percent of the respondents
were found to be using it. This is largely attributed to managers being unaware of the
technique, and to some extent, to the technique’s complexity. On the other hand,
managers were generally found to recognise the flexibility despite not using ROV,
although it was not confirmed whether they quantify this flexibility.
Description
Thesis (MComm (Business Management))--University of Stellenbosch, 2006.
Keywords
Real options, Capital budgeting, JSE top 40, Managerial flexibility, Capital investments -- Valuation -- South Africa, Real options (Finance) -- South Africa, Capital budget -- South Africa, Dissertations -- Business management, Theses -- Business management, Assignments -- Business management