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

• Main Authors: Rafael Stille, Celso F. Lemme, Luiz Eduardo T. Brandão
• Format: Article
• Language: English
• Published: Brazilian Society of Finance 2010-10-01
• Series: Revista Brasileira de Finanças
• Subjects: Real Options; Project Valuation; Telcommunications; 3G mobile phone systems
• Online Access: http://virtualbib.fgv.br/ojs/index.php/rbfin/article/view/2675
• ISSN: 1679-0731; 1984-5146

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.