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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.
Bonds: The company issued 240,000 bonds. The bonds have a $1,000 face value with 7.5% coupons with annual payments, 20 years to maturity, and currently sell for $940. The marginal tax rate is 40%. Equity: The company has 9,000,000 shares of (common) ..
Last week, Onboard Co. has announced that the next two annual dividends will be in the amount of $2.66 and $4.01, respectively. After that, the dividends will increase by 2.02 percent annually. The required return on this stock is 12.99 percent. What..
Imagine you are discussing a loan with a somewhat unscrupulous lender. You want to borrow $20,000 for one year. The interest rate is 12.5 percent. You and the lender agree that the interest on the loan will be 0.125 × $20,000 = $2,500. So the lender ..
Identify and discuss some of the primary risks the company faces in the near future and create a table showing the stock prices for the past five years
Stock Y has a beta of 1.07 and an expected return of 13.10 percent. Stock Z has a beta of .50 and an expected return of 7 percent. What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other?
The Up and Coming Corporation's common stock has a beta of 1.5. If the risk-free rate is 4 percent and the expected return on the market is 10 percent, what is the company's cost of equity capital?
The price of a product is $32 per unit. A firm can produce this good with variable costs of 20 per unit and total fixed costs of $10,000. What is the break even level of output? What is the break even level of output if fixed costs increase to $18,00..
Portfolio Return At the beginning of the month, you owned $6,200 of Company G, $8,500 of Company S, and $2,000 of Company N. The monthly returns for Company G, Company S, and Company N were 7.75 percent, -1.55 percent, and -.18 percent. What is your ..
In 1867, the United States bought the Alaska territory from Russia at the urging of Secretary of State William H. Seward. The Russian government needed cash and feared the territory might eventually be lost due to conflict or encroachment. In hindsig..
The theory of Foreign Direct Investment (FDI) through Multinational Corporations (MNCs) indicates that FDI/MNC has significant impacts on a host country through three major channels. a. List and explain each of these three channels. b. There are seve..
Susan Beale is a single mother with two children, ages three and six. She pays a total of $7,000 each year to a neighbor to care for her children while she works. how should she report the child care payments and any allowable child care credit?
X-Terra stocks just paid a dividend of $2.00 per share (i.e., D0=2.0). If the expected long-run growth rate for this stock is 5%, and if investors require 19% return, what is the price of the stock?
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