Company C faces some difficulties completing its most important project and hires Ms Tech as project...

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Company C faces some difficulties completing its most important project and hires Ms Tech as project manager because she has some engineering expertise that is particularly relevant. The firm stock price is S and to induce Ms Tech to get the project back on the right track they offer her 1000 options at strike price S. Consider Ms Tech's choices of strategy to fix the problem in different scenarios. 1. On her first day of work the stock price is 5 and she has to chose between a safe and a risky project completion path. If she picks the safe path, the fix will be expensive but work for sure and the stock price will be S with probability 0.5 and 1.25 with probability 0.5. If she picks the risky approach, the project does not get completed on time with probability 0.5 and the stock price will fall to 0.8S. With equal probability she will find very cheap fix and the stock price will jump to 1.3S. Which strategy does she pick? What would share holders want her to do? 2. On her first day of work the stock price is S₁-1.25 and she has to choose between a safe and a risky project completion. If she picks the safe path, the fix will be expensive but work for sure and the stock price will be S₁ with probability 0.5 and 1.2 S₁ with probability 0.5. If she picks the risky approach, the project does not get completed on time with probability 0.5 and the stock price will fall to 0.85₁. With equal probability she will find very cheap fix and the stock price will jump to 1.35₁. Which strategy does she pick? What would shareholders want her to do? 3. Can you just change the success probabilities in case 1 to make the shareholders agree with her choice of strategy? How? Company C faces some difficulties completing its most important project and hires Ms Tech as project manager because she has some engineering expertise that is particularly relevant. The firm stock price is S and to induce Ms Tech to get the project back on the right track they offer her 1000 options at strike price S. Consider Ms Tech's choices of strategy to fix the problem in different scenarios. 1. On her first day of work the stock price is 5 and she has to chose between a safe and a risky project completion path. If she picks the safe path, the fix will be expensive but work for sure and the stock price will be S with probability 0.5 and 1.25 with probability 0.5. If she picks the risky approach, the project does not get completed on time with probability 0.5 and the stock price will fall to 0.8S. With equal probability she will find very cheap fix and the stock price will jump to 1.3S. Which strategy does she pick? What would share holders want her to do? 2. On her first day of work the stock price is S₁-1.25 and she has to choose between a safe and a risky project completion. If she picks the safe path, the fix will be expensive but work for sure and the stock price will be S₁ with probability 0.5 and 1.2 S₁ with probability 0.5. If she picks the risky approach, the project does not get completed on time with probability 0.5 and the stock price will fall to 0.85₁. With equal probability she will find very cheap fix and the stock price will jump to 1.35₁. Which strategy does she pick? What would shareholders want her to do? 3. Can you just change the success probabilities in case 1 to make the shareholders agree with her choice of strategy? How?

Answer rating: 100% (QA)

To decide which strategy to pick Ms Tech should compare the expected payoffs of the safe and risky approaches Expected payoff of safe approach 05S cos... View the full answer