Chapter 25, Problem 6M

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 for one 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: The implications of employee stock options and discuss whether Person X will suggest an improvement for the traditional employee stock options.