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 discuss: How to evaluate the given argument and how the repricing possibility will affect the employee stock option value at its granting time.

Question

Want to see the full answer?

Answer 1

Question

Chapter 25, Problem 5M

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 discuss: How to evaluate the given argument and how the repricing possibility will affect the employee stock option value at its granting time.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

No chatgpt!! The weighted average cost of capital (WACC) is used to:A) Measure the profitability of a companyB) Determine the cost of debt financing onlyC) Calculate the company’s average cost of financing from debt and equityD) Estimate the future stock price need help.

No AI The weighted average cost of capital (WACC) is used to:A) Measure the profitability of a companyB) Determine the cost of debt financing onlyC) Calculate the company’s average cost of financing from debt and equityD) Estimate the future stock price

Cost of Trade Credit A large retailer obtains merchandise under the credit terms of 3/20, net 35, but routinely takes 65 days to pay its bills. (Because the retailer is an important customer, suppliers allow the firm to stretch its credit terms.) What is the retailer's effective cost of trade credit? Assume a 365-day year. Do not round intermediate calculations. Round your answer to two decimal places. The answer is not 27.09 which is incorrect.