Reference no: EM132953359

Question - You are a Chief Financial Officer (CFO) of a Boutique Fashion firm that is ready to enter the leather bags business. Despite the coronavirus pandemic, demand for fashion products seems to be rising and you believe that it is right today to enter the business. You also believe that exactly a year from now would also be a good opportunity because of the mass vaccination to contain the pandemic. It will cost you £35.2 million to enter the market. You can construct a perfectly comparable company to mimic existing public companies in this sector of the fashion industry. Hence, you have decided to use the Black-Scholes formula to decide when and if you should enter the leather bags business. Your analysis implies that the current value of an operating leather bags company is £40.4 million. However, the flow of customers is uncertain, and your analysis indicates a volatility of 25% per year. Twenty percent of the value of the company is attributable to the value of the free cash flows expected in the first year. If the one-year risk-free rate of interest is 4.1%:

-Should the Boutique Fashion firm enter this business and, if so, when?

-How will the decision change if the current value of a leather bag company is £35.6 million instead of £40.4 million?