Case synopsis: Person X has joined in the management position with Firm E, a chain of restaurant, which has gone public in the previous year. One issue that Person X was dealing is that the restaurant businesses are very risky. However, he found that it was not as risky as it was thought. At Person X’s interview, the benefits mentioned to him are the employee stock options. After signing the contract of employment, he received options with a strike price for few numbers of shares. This option has a vesting period for 3 years. The employee stock options follows Continent E style put for the first 3 years and then it follows the put-style of Country A. The trading price of Firm E is $32.47 per share. No market trading options are available on the company’s stock. As the company has been traded only for a year, Person X can utilize the historical return to project the standard deviation on the stock’s return. Characters in the case: Person X Firm E Adequate information: Person X does not expect any dividend as the firm is relatively young and can expect that the total earnings will be reinvested into the company for the future. To calculate: The minimum value and the maximum value that Person X will assign if he is trying to value his options.

Question

Want to see the full answer?

Answer 1

Question

Chapter 25, Problem 1M

Summary Introduction

Case synopsis:

Person X has joined in the management position with Firm E, a chain of restaurant, which has gone public in the previous year. One issue that Person X was dealing is that the restaurant businesses are very risky. However, he found that it was not as risky as it was thought. At Person X’s interview, the benefits mentioned to him are the employee stock options.

After signing the contract of employment, he received options with a strike price for few numbers of shares. This option has a vesting period for 3 years. The employee stock options follows Continent E style put for the first 3 years and then it follows the put-style of Country A. The trading price of Firm E is $32.47 per share. No market trading options are available on the company’s stock.

As the company has been traded only for a year, Person X can utilize the historical return to project the standard deviation on the stock’s return.

Characters in the case:

Person X

Firm E

Adequate information:

Person X does not expect any dividend as the firm is relatively young and can expect that the total earnings will be reinvested into the company for the future.

To calculate: The minimum value and the maximum value that Person X will assign if he is trying to value his options.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

Can anyone figure this out correctly? I keep getting the wrong answers over and over? Cost of Trade Credit Grunewald Industries sells on terms of 3/10, net 40. Gross sales last year were $4,161,000 and accounts receivable averaged $370,500. Half of Grunewald's customers paid on the 10th day and took discounts. What are the nominal and effective costs of trade credit to Grunewald's nondiscount customers? (Hint: Calculate daily sales based on a 365-day year, calculate the average receivables for discount customers, and then find the DSO for the nondiscount customers.) Do not round intermediate calculations. Round your answers to two decimal places. 1.) Effective cost of trade credit:

Explain how an increase in interest rates by a central bank could affect bond prices and stock market performance. Explanation.

What is the purpose of diversification in an investment portfolio, and how does it reduce risk?