A company decides to award stock options to its CEO at a time when the stock price is $40 per share. The call options will have a 1-year expiry and have an exercise price of $20 per share. The standard deviation of stock returns is 30% and the risk-free rate is 0.5% p.a. In preparing its accounts, however, the company pretends that the stock price at the time of issuing these call options was $20. Considering this information, answer the following questions:i) What is the actual value of one stock option awarded to the CEO?ii) What is the declared value of one stock option awarded to the CEO?iii) Why is this situation scandalous? Discuss briefly (50-100 words
A company decides to award stock options to its CEO at a time when the stock price is $40 per share. The call options will have a 1-year expiry and have an exercise price of $20 per share. The standard deviation of stock returns is 30% and the risk-free rate is 0.5% p.a. In preparing its accounts, however, the company pretends that the stock price at the time of issuing these call options was $20. Considering this information, answer the following questions:i) What is the actual value of one stock option awarded to the CEO?ii) What is the declared value of one stock option awarded to the CEO?iii) Why is this situation scandalous? Discuss briefly (50-100 words
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
A company decides to award stock options to its CEO at a time when
the stock price is $40 per share. The call options will have a 1-year
expiry and have an exercise price of $20 per share. The standard
deviation of stock returns is 30% and the risk-free rate is 0.5% p.a.
In preparing its accounts, however, the company pretends that the
stock price at the time of issuing these call options was $20.
Considering this information, answer the following questions:
i) What is the actual value of one stock option awarded to the
CEO?
ii) What is the declared value of one stock option awarded to the
CEO?
iii) Why is this situation scandalous? Discuss briefly (50-100
words
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