To Buy or Not to Buy UMTS Licenses? A Real Options Approach

Banque et Marches, No. 59, July-August 2002

18 Pages Posted: 27 Jul 2005

See all articles by Véronique Bessière

Véronique Bessière

University of Montpellier - MRM - IAE

Michael Kaestner

Toulouse University

Abstract

This article describes a methodology for evaluating UMTS licenses using a real options approach. The acquisition of the license is viewed as the right to undertake the infrastructure investments that the firm can defer. The value of this license equals the value of the investment opportunity. The investment is assumed to be instantaneous and the cash flows associated with the investment are uncertain.

This uncertainty of future cash flows might make it attractive to wait before investing even if the expected NPV is positive. The solution specifies the cash flow threshold, where NPV equals the option value and when it the investment should be undertaken. We simulate the impact of different variables (volatility, expected growth rate of cash flows, investment cost, ...) on the investment rule.

Note: Downloadable document is in French.

Keywords: UMTS licences, real options, simulation

JEL Classification: G31,E27

Suggested Citation

Bessière, Véronique and Kaestner, Michael, To Buy or Not to Buy UMTS Licenses? A Real Options Approach. Banque et Marches, No. 59, July-August 2002, Available at SSRN: https://ssrn.com/abstract=759785

Véronique Bessière

University of Montpellier - MRM - IAE ( email )

Place eugène Bataillon
Montpellier, 34000
France

Michael Kaestner (Contact Author)

Toulouse University ( email )

118 Route de Narbonne
Toulouse cedex 9, F-31062
France

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