Kauffman, Inc., has acquired two new companies, one in consumer products and the other in financial services. Kauffman's top management believes that the executives of the two newly acquired companies can be most quickly assimilated into the parent company if they own shares of Kauffman stock. Accordingly, on April 1, Kauffman approved a stock option plan whereby the top four executives of each company could purchase up to 10,000 shares of Kauffman stock at $40 per share. The option will expire in five years.

Required:

1. If Kauffman stock rises to $65 per share by December 1, what is the value of the option to each executive?

2. Discuss some of the advantages and disadvantages of the Kauffman stock option plan.