Case study -4
MANAGERIAL FINANCE –BUS503
Professor : Rob Shah, MBA, CPA, CMA
Course Dates : 01/12 – 03/08
Name : NAVEEN XAVIER
The purpose of this paper is to summarize the Case Study The MBA Decision. This case discusses the Exotic Cuisines Employee stock options. The purpose of this paper is to Exotic Cuisines Employee stock options and make the decision that is going to be the most fiscally responsible in the long run. This decision will be achieved by answering the 6 questions at the end of the case study.
1. We can use the black-scholes equation to value the employee stock options .We need to use the risk free rate that is the same as the maturity as the options .so assuming expiration in three years ,the value of the stock options per share of stock is , D 1 = [ln ($36.28 /$40)+( 0.38 +.60square /2)*3]/(.60*root 3)=.5354 D2=.5354-(.60*root 3)=.5038
Putting this values in to the Black –Scholes model,we find the options value is : C=&36.28(.7038)-($40 e(.038)(.3072)=$14.57
Assuming expiration in 10 years the value of the stock options per share of stock is : D1 =[ln $36.28/$40)+(.044+.60square/2)*10] /(.60*root 10)=1.1291 D2 = 1.1291 –(.60*root 2)=.7682
Putting these values in the black schools model we find the options values C=$36.28(.8706)-$40e( -.044(10)(.2212)=$25.89
2. whether you should exercise the options in three years depends on the several factors .A primary factor is how long you plan to stay with the company .if you planning to leave next week you should exercise the options .A second factor is how the option exercise affect your taxes 3. The fact that the employee stock options are not traded decreases the value of the options .A basic way to understand this is to realize that an options always has the value of since ignoring the premium.it can never lose money .The right...
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