Fermat, Inc., has acquired two new companies, one in consumer products and the other in financial services. Fermat's top management believes that the executives of the two newly acquired companies can be most quickly assimilated into the parent company if they own shares of Fermat stock. Accordingly, on April 1, Fermat approved a stock option plan whereby each of the top four executives of the new companies could purchase up to 20,000 shares of Fermat stock at $15 per share. The option will expire in five years.
Required:
1. If Fermat stock rises to $26.50 per share by December 1, what is the value of the option to each executive?
2. Discuss some of the advantages and disadvantages of the Fermat stock option plan.