TEACHING NOTE
Sally Jameson: Valuing Stock Options in a Compensation Package (Abridged)
Objectives
This case has two educational objectives. First, it serves as an introductory case on option valuation in which students can use market data to place a dollar value on an option they are likely to encounter in their business careers. As such, the case encourages a discussion of the application of option pricing models, such as Black-Scholes, and exposes students to popular misconceptions of how options should be valued. Second, the case permits a discussion of the wisdom and efficacy of incentive stock compensation plans using options.
Synopsis
This case details a thinly disguised situation faced by a recent Harvard MBA graduate
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The case suggests to students that they first attempt to value the option assuming that Ms. Jameson expects to stay at Telstar for the full five years needed to vest, and ignoring taxes and the lack of tradability of the option grant. The grant gives Ms. Jameson a European call on a non-dividend paying common stock currently selling at $18.75, with an exercise price of $35.00, and a maturity of five years. (In practice, this type of option would be structured so as to vest over the five-year interval, and exercisable over a window from perhaps five to ten years from the date of grant.) The student has to choose between a cash grant of $5000 or 3,000 out-of-the-money calls. Students ' first impressions will likely be similar to those of the executives quoted in the supplementary The Wall Street Journal article: "Out-of-the-money options are worthless.” However, given the volatility of Telstar common stock, their analysis should convince them that these options are far from worthless.1 To value this European call, students need to assess the likely volatility of Telstar common stock, and they have both data that can be used to calculate the historical volatility (Exhibit 3) as well as all of the options quoted on Telstar (Exhibit 1). Instructors can use the case to discuss the mechanics of working through Black-Scholes (e.g., how to back out
To equal $6,697.44, the stock price must increase to at least $37.23[2] at the end of the 5th year. The stock price has to be higher than $35 in order to be exercised and make a gain, otherwise she will leave it expire worthlessly. However, from Exhibit 2, Telstar stock price has
One of the important aspects of business management is having a proper compensation system. Compensation ensures that the staff of the company obtains the results of their efforts. Compensation is a cost to the enterprise and, therefore, a proper remuneration model must demonstrate its ability to produce returns. Also, since compensation is what the employees get in exchange for their services, the type used must be one that will motivate the employees (Belcourt & McBey, 2015). Henderson printing company is a mid-level company. Therefore, it requires a very critical remuneration system that will help it to survive. This memo explores the compensation models that Henderson printing operates as well as suggests the necessary changes.
“The Defining Decade” by Meg Jay was an interesting and helpful book to read. The theme of this book is about how important are twenties are in building our future. We usually view our twenties as a decade of having fun and avoiding hard decisions. However, Dr. Meg Jay pointed out that the decisions we make in our twenties can have a profound impact on the life we will be living 10 years from now. Dr. Meg Jay provided advice that we need to hear, so that we will become healthy adults in all areas of our lives.
Yvonne Daniels, also known as the first lady of radio, is an influential women who paved the way for more women to become disc jockeys. In her 30 plus year career in radio she worked at WYNR, WCFL, WSDM, WLS-AM, WVON, WGCI-AM/FM , and WNUA. Daniels was an African American “broadcast pioneer”.
Sabine Sally, the iron beauty of Sabine field; she has stood at her post for many years. Generation after generation of Norwich Cadets have stood in the shadow of the ancient M4 Sherman, taken eyes to her for the last push of motivation, and before her arrival to Norwich University, her kind lead the charge into the European and Pacific theaters of World War Two. The significance of the iron giant is the memory of the armored divisions that laid down their lives to put a stop to Hitler’s war machine. Despite the challenges, Sally’s breed faced a multitude of technologically advanced SS and Wehrmacht panzer battalions that performed in a superior manner in almost every way. The Sherman breed held out through sheer force, will, and the means of production, these traits and abilities were able to stomp out any opposing force.
Jennie Hobson is a 7-year-old European American female who attended a school for children with severe developmental disabilities. She was inexpressive within your classroom environment; furthermore, eye contact was a trait she seldom expressed. Customarily, when left alone Jennie demonstrated behavior of sticking out tongue, make strange sounds, and she would wrap her hand around her throat. Jennie has the ability to use crayon and manipulate paper which demonstrated outstanding usage fine motor skills. Jennie physical aggression exemplified her handiness; consequently, within a few seconds she could grab jewelry or eye glasses and throw them to the other side of the room (Kearney, 2012).
This case was a very significant ruling for special education evident with numerous studies positing that the ruling of this 1982 case was perhaps the most important special education decision by the Supreme Court and to this day, continues to have a profound effect on the education of students with disabilities. Additionally, this was the first time that the Supreme Court had to interpret portions of the Individuals with Disabilities Act (IDEA 1990), which was then the Education for All Handicapped Children Act (EAHCA) as it relates to what constituted a free and appropriate education (FAPE) in the least restrictive environment (LRE).
4. If Ms. Jameson decided that the option was a better deal, but was concerned with being too committed and reliant on the fortunes of Telstar, she could modify her compensation package to better suit her individual needs. Ms. Jameson would be taking considerable risk by keeping all of her bonus in Telstar for stock options with such a lengthy expiration date and also due to the historical data of Telstar showing that only stock prices reached $35 (the exercise price) only once.
I concur with your conclusion that Linda Riley is both unstructured and determined. One would describe Riley as unorganized because of her blatant inability to form a plan that she can continue for the remainder of college. At first, Riley could not create a plan that allowed her to party and still complete all of her assignments in a timely fashion. Then, she attempts to create a plan, but this did not continue for long because there was too much time for certain subjects and not enough for others. On the other hand, one could also describe Riley as determined because she continuously seeks ways to study until she finds a method that works for her, and she eventually does. Although Riley’s essay shows many different aspects of her personality,
Prof. McGill should diplomatically handle the matter with Sarah. Any censure or criticism by Prof. McGill at this point could affect her morale
Set in May 2005, this case invites the student to assess Berkshire Hathaway’s bid, through MidAmerican Energy Holdings Company, its wholly owned subsidiary, for the regulated energy-utility PacifiCorp. The task for the student is to perform a simple valuation of PacifiCorp and to consider the reasonableness of Berkshire’s offer. Student analysis readily extends into the investment philosophy and the remarkable record of Berkshire’s chair and CEO, Warren E. Buffett.
Sherry Ortner’s article talks about the inferiority of women in a patriarchal society. She discussed the reasons as to why women, being in a nature position, are considered less superior than men who are in culture position. The biological reproductive structure of women, their social roles like in the domestic circle, and their psychic structure make them lean more on nature. According to her, the very role of culture is to include and surpass nature, and for that reason, since men are associated with culture then women will naturally be subordinated. However, Ortner also mentioned that women are not totally leaning on the nature side. They can also be part of the culture side. One example Ortner used is the ability of women to bring up their
127). Such propose may be of good intention, but it is clearly premature. Since not all effort by employees may pay off in the near future, such as research. In that case, stock-based compensation would be a good motivator, since it align the interest of the employees and that of the company in the long run. Yet Martin argues that instead of resorting to stock-based compensation, companies should design a reality-based compensation with more creativity that would take into consideration future revenues. For instance, Martin argues, the compensation could be delivered in the form of royalty or licensing fee. Such method may seem to be reasonable and sensible, but only theoretically. As a matter of fact, not all work could be recognized in terms of royalty and patent. For example, a significant part of human resource managers’ work is hard to measure quantitatively, making it unpractical to calculate the compensation based on their work results. Given that spend much time and effort in developing a reality-based compensation system may well not be cost effective, stock-based compensation would be the optimal option for
The net present value (NPV) of each option has been calculated and included in Table 1, based on figures from the study group report. Unfortunately, these figures are flawed in the same manner as Wriston’s current performance and accounting mechanisms in that they don’t properly allocate revenue, nor do they recognize inherent manufacturing complexities. The plant closure option’s expected operational gain seems particularly suspect. A better valuation of the new plant options is perhaps
However, Ms. Holmes still has a risk of losing money if she exercised the ISO early and the stock price decreases. Smart as Ms. Holmes is, she set up an agreement with the Company to exercise the options without having to pay upfront. When the stock price goes down, Ms. Holmes can simply return the shares. By doing so, Ms. Holmes successfully avoids the risk from the declining of the stock price.