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An Application of the Real Options Method to the Valuation of a License to Operate 3G Mobile Phone Service in Brazil

Author

Listed:
  • Rafael Stille

    (McKinsey & Company)

  • Celso Funcia Lemme

    (Instituto COPPEAD de Administração)

  • Luiz Eduardo Teixeira Brandão

    (IAG/PUC-Rio)

Abstract

We analyze the contributions of the real option method to the decision making process in the telecommunications industry. We study the case of a public auction purchase of the license to operate a 3G mobile phone system in Brazil. The results indicate that the embedded flexibilities increase the value of the project by 64% in relative to the discounted cash flow method, which could justify the high premiums paid by the winning firms, which are incompatible with the value obtained from traditional methods of analysis. This suggests that the real options approach used, which can be easily replicated and is fairly intuitive, can be a useful tool to support the decision making process of these firms.

Suggested Citation

  • Rafael Stille & Celso Funcia Lemme & Luiz Eduardo Teixeira Brandão, 2010. "An Application of the Real Options Method to the Valuation of a License to Operate 3G Mobile Phone Service in Brazil," Brazilian Review of Finance, Brazilian Society of Finance, vol. 8(3), pages 329-349.
    • Handle: RePEc:brf:journl:v:8:y:2010:i:3:p:329-349
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    More about this item

    Keywords

    Real Options; Project Valuation; Telcommunications; 3G mobile phone systems; ; Real Options; Project Valuation; Telcommunications; 3G mobile phone systems;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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