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CHAPTER 25
EXOTIC CUISINE EMPLOYEE STOCK
OPTIONS
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:
3
3
Putting these values into the Black-Scholes model, we find the option value is:
Assuming expiration in 10 years, the value of the stock options per share of stock is:
10
Putting these values into the Black-Scholes model, we find the option value is:
2. Whether you should exercise the options in three years depends on several factors. A primary factor
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 option always has value since, ignoring the premium, it
CHAPTER 24 C-2
4. The rationale for employee stock options is to reduce agency costs by better aligning employee and
shareholder interests. Vesting requires employees to work at a company for a specified time, which
5. The evaluation of the argument for or against repricing is open-ended. There are valid reasons on
both sides of the discussion. Repricing can be viewed as a negative. If an employee knows the option
Repricing increases the value of the employee stock option. Consider an extreme: A company
6. Employee stock options increase in value if the stock price increases; however, the stock price can
A better method of valuing employee stock options might be to reward employees for company
