Company X's CEO has 50 million shares of stocks and 60 million shares of options (of Company X). The stock return volatility (o) is 1.5, dividend yield (d) is 0.07, riskfree rate (r) is 0.12, and maturity (T) is 1 year. Following table shows stock price of Company X during 2020. Suppose that Company X announced that the (at-the- money) options granted to the CEO in April 2020, but were actually granted in October 2020. How much (in terms of dollar amount) did the CEO gain by misreporting the option grant date by 6 months? [Company X Stock Price, 2020] Feb, 2020: $10.5 Apr, 2020: $5.0 Jun, 2020: $9.1 Aug, 2020: $8.5 Oct, 2020: $17.0 Dec, 2020: $20.0
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
![Company X's CEO has 50 million shares of stocks and 60 million shares of options (of
Company X). The stock return volatility (0) is 1.5, dividend yield (d) is 0.07, riskfree
rate (r) is 0.12, and maturity (T) is 1 year. Following table shows stock price of
Company X during 2020. Suppose that Company X announced that the (at-the-
money) options granted to the CEO in April 2020, but were actually granted in
October 2020. How much (in terms of dollar amount) did the CEO gain by
misreporting the option grant date by 6 months?
[Company X Stock Price, 2020]
Feb, 2020: $10.5
Apr, 2020: $5.0
Jun, 2020: $9.1
Aug, 2020: $8.5
Oct, 2020: $17.0
Dec, 2020: $20.0](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F408f4f8c-8667-4e4a-86df-a787086e6f6b%2Fc534803b-8c9c-4886-8d50-a24a3f9d609d%2Fcma9sx_processed.jpeg&w=3840&q=75)
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