Traditional and wacky-using logical and economic arguments

Assignment Help Financial Management
Reference no: EM131189871

You are the Chairman of the Board of Directors, and you need to choose one of these schemes. Which one would you choose. Please defend your answer using logical and economic arguments.

Scheme one (Traditional): Let X denote the closing stock price at the time the stock option is granted. The stock option has 10 years until it expires worthless unless exercised before the expiration date. The first three years of the 10-year life of the option is known as the vesting period, and the options cannot be exercised during the vesting period. Once the vesting period is over, and the options are vested, hence exercisable, the employee has the right to exercise the option anytime he/she wants by paying $X per share. Let S(t) denote the stock price at the time of option exercise. Of course we would expect S(t)>>X. For convenience, we will not ask the employee to pay actual money, instead for each option he will be granted (S(t) – X)/S(t) = (1 – X/S(t)) shares for free.

Scheme two (Wacky): Let X denote the closing stock price at the time the stock option is granted. The stock option has 10 years until it expires worthless unless exercised before the expiration date. The first three years of the 10-year life of the option is known as the vesting period, and the options cannot be exercised during the vesting period. Let S(t) denote the stock price at the time of option exercise, and let S(v) denote the average daily price of the stock during the 3-years of vesting period. Once the vesting period is over, the employee has the option to exercise any time until expiration. Upon exercise, for each option the employee has, he will be given 0.5 (S(t) + S(v) – X) / S(t) = 0.5 + (S(v) – X)/S(t) shares for free.

Reference no: EM131189871

Questions Cloud

Compute the gain or loss on the sale : A taxpayer paid $500,000 for a small industrial property (80 percent of the value is properly attributable to the building, the balance to the land) and incurred transaction costs that equaled five percent of the purchase price. During her 18th month..
Assuming variable rate remains constant until end of year : Sundar has just purchased a house in Melbourne, at a total cost of $1,000,000. He has saved up a deposit of $200,000 towards this amount, and is covering the balance using a mortgage from ROOMS Home Loans. Calculate Sundar’s monthly repayments over t..
Revenue recognition at the completion of earnings process : Revenue Recognition Alternatives Slattery Company was formed on January 1, 2013, to build a single product. The company issued no-par common stock on that date for $280,000 cash. Prepare the 2013 ending balance sheet under revenue recognition at the ..
Determine the optimum replacement cycle for compressors : The ACME Company is planning on purchasing a number of high grade compressors for operations. As part of the economic analysis performed, the economic replacement cycle for all equipment purchases used in operations required the determination of the ..
Traditional and wacky-using logical and economic arguments : You are the Chairman of the Board of Directors, and you need to choose one of these schemes. Scheme one (Traditional): Let X denote the closing stock price at the time the stock option is granted. The stock option has 10 years until it expires worthl..
Require on a project of average risk : The Chris-Kraft Co. is financed entirely with equity and the firm has a beta of 1.6. The current risk-free rate is 9.5 percent and the expected market return is 16 percent. What rate of return should Chris-Kraft require on a project of average risk?
Considering an investment project with risk : The Chris-Kraft Co. is financed entirely with equity and the firm has a beta of 1.25. The current risk-free rate is 7 percent and the expected market return is 15 percent. Chris-Kraft is considering an investment project with a risk that matches the ..
Retirement fund earning : If person A contributes $250 per month to a retirement fund earning 11% per year for 12 years and then just leaves the amount in there to earn for the next 25 years and person B starts investing $250 per month to the same fund at the same time as per..

Reviews

Write a Review

 

Financial Management Questions & Answers

  What is the cross-exchange rate between yen and NZD

The New Zealand dollar and U.S. dollar S($/NZD) spot exchange rate is 0.6717. The Japanese yen and U.S. dollar S(¥/$) spot exchange rate is 120.12. What is the cross-exchange rate between yen and NZD, S(¥/NZD)? If there is arbitrage opportunity, stat..

  Potentially increase demand

Best's product manager continues to perform well in the market. However, a competing product is coming on strong and is looking to take over as the market share leader in the segment. Without sacrificing contribution margin, what can the Best product..

  Service staff with an electronic ordering process

A restaurant is contemplating replacing its service staff with an electronic ordering process. Installing computers at each table will cost $150,000, but is expected to generate a cost savings of $40,000 per year for the next 10 years, when the compu..

  Evaluate generation project with the cash flows

Light Sweet Petroleum, Inc., is trying to evaluate a generation project with the following cash flows: Year Cash Flow 0 –$ 39,400,000 1 63,400,000 2 – 12,400,000 a-1 What is the NPV for the project if the company requires a return of 10 percent?

  Potential gains-losses at option expiration for stock prices

Suppose you write 25 put option contracts with a $45 strike. The premium is $3.80. Evaluate your potential gains and losses at option expiration for stock prices of $35, $45, and $55

  Which trade theory do you think best explain trade flows

Which trade theory do you think best explain trade flows between the United States and China? Why? Do you think that China is pursuing an economic policy that can be characterized as neo-mercantilist?

  What is meant by the signaling effects of dividend policy

Explain what is meant by the clientele effect. Explain what is meant by the informational content of dividend policy. Explain what is meant by the signaling effects of dividend policy.

  Difference between periodic and perpetual inventory tracking

What is the difference between periodic and perpetual inventory tracking? Are there cases where a health care organization could use both methods of inventory costing for different types of inventory, and if so, please explain why they would do this.

  What ownership percentage of our firm must be sold

A potential investor is seeking to invest $750,000 in our venture at an expected 40% rate of return. The firm currently has 2,000,000 shares held by the founders. The venture is projected to generate $850,000 in income per year over the next 5 years...

  What is the unlevered value of the firm

Forbidden Fruit Extracts expects its earnings before interest and taxes to be $325,000 a year forever. Currently, the firm has no debt. The cost of equity is 16.3 percent and the tax rate is 35 percent. The company is in the process of issuing $2 mil..

  Considering an investment-assuming market is in equilibrium

You are considering an investment in Keller Corp's stock, which is expected to pay a dividend of $1.75 a share at the end of the year (D1 = $1.75) has a beta of 0.9. The risk-free rate is 3.1%, and the market risk premium is 5.5%. Keller currently se..

  Is the interest rate parity holding

A foreign exchange arbitrageur notices that the Japanese yen to U.S. dollar spot exchange rate is ¥108/$ and the three-month forward exchange rate is ¥107.30/$. The three-month $ interest rate is 5.20 percent per Annum and the three-month ¥ interest ..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd