Sally Jameson Stock Options
Student Number: Assignment Title: Course Code: Course Title: Section #:
999346845 Assignment 16 RSM 1331 Finance I: Capital Markets & Valuation 1 2 AM 3 PM 4 5
In submitting this work for grading, I confirm: • That the work is original, and due credit is given to others where appropriate • Acceptance and acknowledgement that assignments found to be plagiarized in any way will be subject to sanctions under the University’s Code of Behaviour on Academic Matters. Please pay attention to the course outline for specific formatting requirements set by instructors. Assignments are to be submitted using student ID numbers only; do not include your name. Please note that assignments that include names or that do not have the box below checked will not be graded. Please check the box and record your student number below to indicate that you have read and abide by the statements above.
1. Describe, in general terms, Sally’s Executive Stock Option decision. You should recognize this as an NPV problem that compares alternative future cash flows. What is the NPV of the cash alternative? The cash alternative being referred to here is the Telstar Communications option tranche on offer, the present value of which needs to be compared with that of the cash option. • • PV [Cash Option]: $5,000.000 PV [Stock Options]: $11,724.000 • Calculated using Black Scholes Option Valuation Model (approach / methodology follows)
2. Describe Sally’s ESOs in terms of the parameters which would be input into an option pricing model. Which option pricing model is appropriate? • Sally is being offered 3,000 options to purchase Telstar Communications shares at $35.000 on her fifth anniversary with the firm. In other words, Sally is being granted the right to, but not the obligation to, purchase these shares on (not before) her fifth anniversary with Telstar. Since Sally cannot exercise her options before five years with the firm, these are European options, which can be valued using the
999346845 Assignment 16 RSM 1331 Finance I: Capital Markets & Valuation 1 2 AM 3 PM 4 5
In submitting this work for grading, I confirm: • That the work is original, and due credit is given to others where appropriate • Acceptance and acknowledgement that assignments found to be plagiarized in any way will be subject to sanctions under the University’s Code of Behaviour on Academic Matters. Please pay attention to the course outline for specific formatting requirements set by instructors. Assignments are to be submitted using student ID numbers only; do not include your name. Please note that assignments that include names or that do not have the box below checked will not be graded. Please check the box and record your student number below to indicate that you have read and abide by the statements above.
1. Describe, in general terms, Sally’s Executive Stock Option decision. You should recognize this as an NPV problem that compares alternative future cash flows. What is the NPV of the cash alternative? The cash alternative being referred to here is the Telstar Communications option tranche on offer, the present value of which needs to be compared with that of the cash option. • • PV [Cash Option]: $5,000.000 PV [Stock Options]: $11,724.000 • Calculated using Black Scholes Option Valuation Model (approach / methodology follows)
2. Describe Sally’s ESOs in terms of the parameters which would be input into an option pricing model. Which option pricing model is appropriate? • Sally is being offered 3,000 options to purchase Telstar Communications shares at $35.000 on her fifth anniversary with the firm. In other words, Sally is being granted the right to, but not the obligation to, purchase these shares on (not before) her fifth anniversary with Telstar. Since Sally cannot exercise her options before five years with the firm, these are European options, which can be valued using the