Question: Jessica Lazarus has just been named the new CEO of
Jessica Lazarus has just been named the new CEO of BluBell Fitness Centers Inc. In addition to an annual salary of $375,000, her three-year contract states that her compensation will include 15,000 at-the-money European call options on the company’s stock that expire in three years. The current stock price is $34 per share, and the standard deviation of the returns on the firm’s stock is 74 percent. The company does not pay a dividend. Treasury bills that mature in three years yield a continuously compounded interest rate of 5 percent. Assume that Jessica’s annual salary payments occur at the end of the year and that these cash flows should be discounted at a rate of 9 percent. Using the Black–Scholes model to calculate the value of the stock options, determine the total value of the compensation package on the date the contract is signed.
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