Suppose your employer offers y
Suppose your employer offers you a choice between a
$5,800
bonus and
400
shares of the company stock. Whichever one you choose will beawarded today. The stock is currently trading for
$58
per share. Ignore transaction costs.
a. Suppose that if you receive the stock?bonus, you are free to trade it. Which form of the bonus shouldyou? choose? What is its? value?
b. Suppose that if you receive the stock?bonus, you are required to hold it for at least one year. What canyou say about the value of the stock bonus? now? What will yourdecision depend? on?
Answer:
Solution:-
a) Value of the stock bonus today =400 ´$58 =$23,200
Value of the cash bonus today =$5800
We can sell the stock for $23,200 in cash today , hence thevalue of stock bonus will be = $23,200 which is better than thecash bonus of $5800 today.
Hence we should take the stock bonus option .
b) Since 400 shares could be bought at $23,200 today, hence thevalue of stock bonus will be $23,200 or less than that. If we arenot allowed to sell the company stock for next 1 year, its valuecould be less than $23,200. The value of stock sock dividend willdepend on what we expect the stock price next year and the risk .We cannot simply say which option to choose by surety.
But since the value of stock dividend is much higher than cashbonus, unless we are very bearish in the stock of company it mightbe profitable to take stock bonus . Because stock prices have tofall 75% from current level to reach the cash bonus value. It seemsless likely , hence stock bonus might be profitable.
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