Stock Option Valuation Assignment
|PAPER TYPE||MATH PROBLEMS|
|# OF SOURCES||3|
|# OF PROBLEMS||3|
|This assignment is due at the beginning of class. Please work in the teams I assigned at the beginning of the semester, not individually. I expect your report to read like an actual report with an intro, analysis, and conclusion – not just a series of answers to questions. I would not expect your write-up to exceed 5 pages in the body plus an appendix for tables and figures. Brevity and preciseness is an outstanding writing trait. Roughly 25% of the grade will be based on your ability to present accurately and efficiently. Please show your calculations.|
1. You are on the compensation committee designing compensation packages for all employees. You are trying to understand the value and incentives of what you pay people. If you ignore income taxes and assume Larry will be with the company in five years, what is the present value of the options being offered according to the Black-Scholes model?
2. As you consider the options versus the cash bonus, please discuss how the following considerations may affect the decision supported with some numerical analysis if applicable.
3. Suppose Larry and the CEO each own 1,000 shares of Athena stock and 20,000 options on 5/29/13. Assume they value the options based on the Black-Scholes value only (no discounts or haircuts for any other issues; use a 10-year expiration). Not that this is the correct value, but for this problem assume the volatility is 30%.