CHAPTER 17
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:
d1 = [ln($17.89/$45) + (.015 + .652/2) 3]/(.65
3
) = –.2164
d2 = –.2164 – (.65
3
) = –1.3423
N(d1) = .4143
N(d2) = .0898
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
is how long you plan to stay with the company. If you are planning to leave next week, you should
exercise the options. A second factor is how the option exercise will 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 option always has value since, ignoring the premium, it can
never lose money. The right to sell an option also has to have value. If the right to sell is removed, it
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
will vest soon.
5. The evaluation of the argument for or against repricing is open-ended. There are valid reasons on both
sides of the discussion.
Repricing increases the value of the employee stock option. Consider an extreme: A company
if the stock falls, does the stock option actually reward better performance?
6. Employee stock options increase in value if the stock price increases; however, the stock price can
increase because of a general market increase. Consider a company of average risk in a bull market
that has a large return for several years. The company’s stock should closely mirror the market return,