Jared Lazarus has just been named the new chief executive officer of BluBell Fitness Centers, Inc. In
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Jared Lazarus has just been named the new chief executive officer of BluBell Fitness Centers, Inc. In addition to an annual salary of $425,000, his 3-year contract states that his compensation will include 25,000 at-the-money European call options on the company’s stock that expire in three years. The current stock price is $47 per share and the standard deviation of the returns on the firm’s stock is 52 percent. The company does not pay a dividend. Treasury bills that mature in three years yield a continuously compounded interest rate of 5 percent. Assume that the annual salary payments occur at the end of the year and that these cash flows should be discounted at a rate of 7 percent. Using the Black-Scholes model to calculate the value of the stock options, determine the total value of the compensation package on the date the contract is signed.
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The total compensation package consists of an annual salary in addition to 25000 atthemoney stock op...View the full answer
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Stocks (also known as equities) are securities that represent ownership in a company. They are issued by companies to raise capital, and when an individual buys stocks, they become a shareholder in that company.
Investing in stocks can be a way for individuals to potentially earn a return on their investment through dividends and capital appreciation. However, investing in stocks also carries a level of risk, as the value of the stock can fluctuate based on various factors such as the financial performance of the company and general market conditions.
For companies, issuing stocks can be a way to raise funds for growth and expansion. When a company goes public by issuing an initial public offering (IPO), it can raise significant capital by selling ownership stakes to the public. Companies can also issue additional stock offerings to raise additional capital as needed.
