Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
11th Edition
ISBN: 9780077861759
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 23, Problem 1CQ
Employee Stock Options Why do companies issue options to executives if they cost the company more than they are worth to the executive? Why not just give cash and split the difference? Wouldn’t that make both the company and the executive better off?
Expert Solution & Answer
Summary Introduction
To identify: Reason to issue employee stock option to executive and not to provide cash to split the difference and also determine whether the executive and the company has a better off.
Employee Stock Option:
Employee stock option is given by the company to attract and retain the employees in the organization. Company contract with the employee and gives the right to purchase some number of stock of share from the company within a period.
Answer to Problem 1CQ
- The performance of the company totally depends upon the performance of executive member of the company. If they have some stock in the company then they will work hard to improve the situation of the company so that value of their stock increases.
- If the employee stock option is given to the top management then they can be paid low so that other employee does not feel disparities in pay.
- If employee stock option is not provided to top management then they will have to pay more income tax. If this option is available with the top management then they have to pay tax only on capital gain which is lesser than the income tax.
Explanation of Solution
- Employee stock option is given to the executive so that they work hard and improve the performance of the company.
- When stock option is given to executive, they are paid low and disparity of high pay is finished.
Conclusion
So, employee stock option should be given to the executive to improve the performance of the company.
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Suppose that you are a U.S.-based importer of goods from the United Kingdom. You expect the value of the pound to increase against the U.S. dollar over the next 30 days. You will be making payment on a shipment of imported goods in 30 days and want to hedge your currency exposure. The U.S. risk-free rate is 5.5 percent, and the U.K. risk-free rate is 4.5 percent. These rates are expected to remain unchanged over the next month. The current spot rate is $1.90.
1.Move forward 10 days. The spot rate is $1.93. Interest rates are unchanged. Calculate the value of your forward position. Do not round intermediate calculations. Round your answer to 4 decimal places.
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Chapter 23 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 23 - Employee Stock Options Why do companies issue...Ch. 23 - Real Options What are the two options that many...Ch. 23 - Project Analysis Why does a strict NPV calculation...Ch. 23 - Real Options Utility companies often face a...Ch. 23 - Prob. 5CQCh. 23 - Real Options Star Mining buys a gold mine, but the...Ch. 23 - Real Options You are discussing real options with...Ch. 23 - Real Options and Capital Budgeting Your company...Ch. 23 - Insurance as an Option Insurance, whether...Ch. 23 - Real Options How would the analysis of real...
Ch. 23 - Prob. 1QPCh. 23 - Prob. 2QPCh. 23 - Binomial Model Gasworks, Inc., has been approached...Ch. 23 - Real Options The Webber Company is an...Ch. 23 - Real Options Jet Black is an international...Ch. 23 - Real Options Sardano and Sons is a large, publicly...Ch. 23 - Real Options Wet for the Summer, Inc.,...Ch. 23 - Prob. 8QPCh. 23 - Binomial Model In the previous problem, assume...Ch. 23 - Real Options You are in discussions to purchase an...Ch. 23 - Prob. 1MCCh. 23 - Prob. 2MCCh. 23 - Your options, like most employee stock options,...Ch. 23 - Why do you suppose employee stock options usually...Ch. 23 - Prob. 5MCCh. 23 - Prob. 6MC
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