| Summary: | 碩士 === 國立成功大學 === 財務金融研究所 === 95 === When management faces a new project, costs are the most important element. The cost amount will affect the expected profit. By using the NPV method, the cost of facility is irreversible. The fixed assets do not have salvage value, in other words, we cannot gain cash inflow from selling the fixed assets. Management should decide the best strategy of operating leverage according to the market situation. Previous research about operating leverage has concentrated on the relationship between operating risk and operating leverage. In contrast to these literatures, we assume that management needs to think about the possibility of existing real options such as the option to expand, abandon and grow. Real options can increase the value of an investment project. In this paper, we assume that there is an option to expand held by management. Management has to take actions after taking the option into account.
By using a mathematical method, we obtain the conclusion that if management expects the market to be good, they will adopt high operating leverage; if their expectation is bad, they will use low operating leverage and have an option to expand. If the market becomes better in the future, management will exercise the option and transfer to a firm with high operating leverage. Furthermore, if the demand varies a lot, in other words, the volatility greatly, management will tend to use low operating leverage to avoid the high operating risk.
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