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Many companies use stock options (which are call options) to incentivize their employees, particularly C-level executives. An accounting rule dating back to 1972 states that these stock options can be expensed at the value of exercise. That is, they can be put as an expense on the balance sheet as the maximum of zero, and the difference between the fair value of the underlying stock and the exercise price of the option.
a) Does this rule over- or under-estimate the expense of stock market options? Explain.
b) Given your answer to (a), do you think that companies are over- or under-incentivized to use option-based methods of compensation?
Apocalyptica Corp. pays a constant $9.50 dividend on its stock. The company will maintain this dividend for the next 11 years and will then cease paying dividends forever. If the required return on this stock is 11 percent, what is the current share ..
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You have been accepted into college. The college guarantees that your tuition will not increase for the four years you attend college. The first $11500 tuition payment is due in six months. How much money must you deposit today if you intend to make ..
What minimum annual rate of return must the fund earn to make you better off in the fund than in the CD?
Explain how understanding risk and return will help you in future business ventures.
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