The main idea of using options as an incentive is that when the stock price (that...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
The main idea of using options as an incentive is that when the stock price (that is the trading price on the Toronto Stock Exchange, NYSE, or other exchange) rises above the exercise price, the difference between the current trading price and the exercise price can be pocketed by the employee. Normally, once a grant or part of a grant of options has vested, the employee can exercise the options to buy the shares, and then right away sell the shares, and keep the difference (less any taxes and transaction fees). Instructions: . Complete the calculations and table below . You receive 1000 options today. • The option grant has an exercise price of $10. The company share price is $10 today. The options vest 25% per year for the next 4 years. • Assume the company stock will appreciate 10% per year for the next 4 years. • Assuming you keep all your options until the grant is fully vested, what is the value of the total option grant and the vested portion to you after 1, 2, 3, & 4 years: Year. 0 (Today) 1 2 3 Share Price 4 $10.00 $10.00x1.10= $11.00 Vested portion % 0% 25% 50% Vested Portion # 0 250 500 Value to employee of vested portion: Notes: In year 1, above: $10.00 x 1.10= $11.00 the 1.10 comes from the instruction: the company stock will appreciate 10% per year. • The 10% per year is a compounding rate, so for year 2 you need to multiply $11.00 by 1.1, and so on, to find your share price for each year. • The value to the employee is the market value of the share x the number of shares, less the price paid for the shares (that is the exercise price). . For this exercise, we will assume that there are no taxes or fees payable. The main idea of using options as an incentive is that when the stock price (that is the trading price on the Toronto Stock Exchange, NYSE, or other exchange) rises above the exercise price, the difference between the current trading price and the exercise price can be pocketed by the employee. Normally, once a grant or part of a grant of options has vested, the employee can exercise the options to buy the shares, and then right away sell the shares, and keep the difference (less any taxes and transaction fees). Instructions: . Complete the calculations and table below . You receive 1000 options today. • The option grant has an exercise price of $10. The company share price is $10 today. The options vest 25% per year for the next 4 years. • Assume the company stock will appreciate 10% per year for the next 4 years. • Assuming you keep all your options until the grant is fully vested, what is the value of the total option grant and the vested portion to you after 1, 2, 3, & 4 years: Year. 0 (Today) 1 2 3 Share Price 4 $10.00 $10.00x1.10= $11.00 Vested portion % 0% 25% 50% Vested Portion # 0 250 500 Value to employee of vested portion: Notes: In year 1, above: $10.00 x 1.10= $11.00 the 1.10 comes from the instruction: the company stock will appreciate 10% per year. • The 10% per year is a compounding rate, so for year 2 you need to multiply $11.00 by 1.1, and so on, to find your share price for each year. • The value to the employee is the market value of the share x the number of shares, less the price paid for the shares (that is the exercise price). . For this exercise, we will assume that there are no taxes or fees payable.
Expert Answer:
Answer rating: 100% (QA)
Year Share Price Vested portion Vested Portion Value to employee of vested portion 0 Today 1000 0 0 ... View the full answer
Related Book For
Principles Of Managerial Finance
ISBN: 978-0136119463
13th Edition
Authors: Lawrence J. Gitman, Chad J. Zutter
Posted Date:
Students also viewed these accounting questions
-
You can save $5,000 per year for the next 5 years in an account earning 8 percent. how much will you have at the end of the fifth year if you make the first deposit today.
-
The main idea of this case study is taken from (Drury, 2018) and main author is M. Saeudy. A smart Solution is a small sized IT company. It was established since 1980. It produces different kinds of...
-
Fully vested incentive stock options exercisable at $50 per share to obtain 24,000 shares of common stock were outstanding during a period when the average market price of the common stock was $60...
-
Differentiate the function. f(x) = ln(x 2 + 10)
-
In order to respond to the tastes of its patrons, Fairfax County Public Library discards books that have not been checked out in two years in order to make space for more popular books [Miller,...
-
Which functional controls system(s) are directly addressed in this case?
-
The book Code Complete by Steve McDonnell estimates that there are 15 to 50 errors per 1,000 lines of delivered code for computer programs. Assume that for a particular software package, the error...
-
Pressure difference required for flow in pipe with elevation change (Fig. 6A.2). Water at 68?F is to be pumped through 95 ft of standard 3-in. pipe (internal diameter 3.068 in.) into an overhead...
-
Create the code with JAVA. Welcome To The SENTENCE SCAN PROGRAM! ******** Please enter the sentence to scan: My Quiz2 was graded. Here are some data about your sentence: Word 1 has 2 characters. Word...
-
McGuire decides to start slow with a project testing the increased automation of their horse feed line. Below are the projected cost of the expansion in automation, given a 5 year useful life of the...
-
Organization design decisions are influenced by three primary elements: environmental, strategic, and technological. Suppliers, distributors, competitors, and customers are four important factors...
-
What are the emotions associated with color? How can they be used to advertise varied products or services?
-
What is the role of the media mix in an IMC campaign?
-
What are some of the ways to make magazine ads interactive?
-
What attributes make up a brands visual and verbal identity?
-
Explain the diversity of radio advertisings voice.
-
Shanghai Tower is a beautiful and exceptional building not just in China, but in the world. However, the video brings up different and some contrary perspectives on the building, such as the...
-
Imagine you are the HR manager at a company, and a female employee came to you upset because she felt a male coworker was creating a hostile work environment by repeatedly asking her out on dates...
-
The installed cost of a new computerized controller was $65,000. Calculate the depreciation schedule by year assuming a recovery period of 5 years and using the appropriate MACRS depreciation...
-
How is the before-tax cost of debt converted into the after-tax cost?
-
What is an operating unit? What is a divestiture? What are four common methods used by firms to divest themselves of operating units? What is breakup value?
-
Describe the working of a Carnot cycle.
-
Define thermal efficiency of a heat engine.
-
What are the limitations of Carnot cycle?
Study smarter with the SolutionInn App