Laura Martin: Real Options Valuation in the Cable Industry Case Questions
What is the nature of Laura Martin’s job? Define the specific problem that she is addressing.
Laura Martin is an equity research analyst. This was a unique opportunity to demonstrate her knowledge of the drivers of value in the cable industry. She was going to reveal the value of stocks of cable industry using real options, which is a more realistic way of evaluating the value of a project than EBITDA multiples, ROIC analysis and DCF analysis. In 1999 she presented at the Credit Suisse First Boston Broadband conference, where she wanted to portray the message that real options is a superior valuation technique for cable stocks.
The main reason why Laura Martin argues that real options is the correct method for valuing cable stocks is mainly driven by the evolution that this industry was experimenting. In this time period, cable companies were upgrading their cable infrastructure to have 750 MHz of bandwidth capacity, which left unused bandwidth capacity that could be used for other interactive services or services that didn’t exist at the moment. Laura Martin felt, and with reason, that the EBITDA multiplier and the DCF analysis did not account for this possible revenue stream which she named “Stealth Tier”. Her analyses led to a higher stock value using the real options method and lower values using the traditional methods aforementioned.
What methods does Laura consider in valuing the project? What are her reasons for choosing or rejecting each method? Does the data seem to support her point of view?
Identify the variables involved in the real options analysis. How will the value of each affect the acceptance decision?
Is Martin successful in presenting her approach to the valuation problem? Do you have suggestions for how she might have been more effective?
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