CHAPTER 23 CASE C-1
CHAPTER 23
EXOTIC CUISINES’ 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
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:
d1 = [ln($27.15/$40) + (.044 + .602/2) 10] / (.60
√
10
) = .9764
√
10
N(d1) = .8356
N(d2) = .1785
Putting these values into the Black–Scholes model, we find the option value is:
C = $27.15(.8356) – ($40e–.044(10))(.1785)
C = $18.09
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 23 CASE 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.
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