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A company's board is deciding whether to grant the companfs current CEO an option to buy one million shares of the companfs stock at the prioe of $13 per share. The companfs stock is currently trading at $20 per share. The option will expire in six years and the owner of the option can have the ?exibility to exercise the option anytime up until {and including} the option's expiration. This option is not transferrable. Assuming that the rislefree interest rate is 1.5% per annum.
a] If the annualized volatility of this company's stock price is Ell-35 and the public expects the company to pay one dividend of 55 per share in 5 years time from now and another dividend of 53 per share 3* years from now. What is the current value of this option?
b} If the CEO is granted the option stated above today. does he have incentive to pay more or less dividend in the next 6 years? Explain your answer.
c] Suppose if in addition to the discrete dividends destxibed in a}, the company is expected to pay another small dividend of $1 per share 2 years from now, would you be able to use the same approach used in a} to compute the value of Mr. Key's stock options? If yes, explain how you would do that in the simplest way; if no. explain why not.
d} If the shareholders are strongly against the company from taking more risky projects over the next 5 years, do you think the board should grant the EEC] the option described in a]? Explain your answer.
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