LARRY STEFFEN

Valuing stock option

Section A-Group 10
Ishan GuptaH15146
Manuj GulatiH15032

EXECUTIVE COMPENSATION
LARRY STEFFEN
The dilemma of Stock Options vs Cash Bonus

Q1: IGNORING THE INCOME TAX, WHAT IS

THE WORTH OF STOCK OPTIONS
GRANTED TO MR. LARRY?
Assumptions:
The stock options extended to Larry are at the price options
which have exercise price equal to the current price of the stock
Valuation of options is done using Black-Scholes Model
Volatility is taken at 25% (from the graph)

Stock Options valuation based on different maturity periods

Time to maturity
Stock Price (S)
(t)
Strike Price (K)
Risk-free Rate
Volatility ()
Call option Value
Total Value of
Present Value of

5 Years
$22.71
$22.71
1.02%
0.25
$5.457
$27285.86
$25935.87

7 Years
$22.71
$22.71
1.51%
0.25
$6.79
$33952.82
$30571.31

10 Years
$22.71
$22.71
2.13%
0.25
$8.68
$43428.55
$35175.63

Note: All the calculations of stock are calculated ignoring the

income tax.
The value of stock options will vary depending on the time after
which Larry chooses to exercise them. Taking the case of 5,7,10
years of maturity (availability of yield rates), we can see that the

value of stock options is much greater than the bonus paid to

Larry.

Q2: WHICH IS BETTER CASH BONUS OR

STOCK OPTIONS? WHY?
In all the different options of maturity period we can clearly see
that the stock options have a higher present value as compared
to bonus option. But the stock options give a payout only after 5
years but the bonus will be received immediately. Considering
from Larrys perspective, who is a young individual who has just
got out of college and will have high ambitions. Now depending
on the career aspiration of Larry he should make the decision.

Case 1: An individual who wants fast growth and wants to try

multiple organizations before settling for one. There is a good
chance that Larry is that kind of a person who wants to try out
different opportunities before deciding to settle for on for a
longer duration and he might have plans to leave the company in
next 1-3 years. He will be more sure about how long he plans to
stay in the company only after he joins and starts working. Given
all that he should go for the cash bonus option, which will give
him the freedom to switch jobs whenever needed.
Case 2: If Larry is very sure of Athena as an organization he is
going to stick for long and also Larry might be a kind of person
who wants to have a good stable first job to improve his resume
and reflect stability then he should go for the stock option. This
will depend on how fit he is in the role offered and if Athena and
Larry were made for each other than there is no other question
of sticking with the stock option which will get higher returns for
Larry. There is another advantage for Larry if he choses the stock
option, that is Athena will know that he is an individual who will

stay for long and the organization might be interested in

investing in him and giving him more opportunities as compared
to others.

Taking the case from the point of view of the organization, stock
options paly the role of a performance linked pay as the
employee will have to work in fulfilling the interest of the
organization & align with the organization to maximize the stock
value which in turn increases the value of options which he plans
to exercise at a later stage.

Therefore, if employee plans to stay back at the organization for

a long term, stock options prove a healthy incentive for both the
organization as well as the employee.