Alan Smith, the CEO of Digital Storage Devices Pty Ltd has been granted options on 300,000 shares. The stock is currently trading at $27 a share and the options are at the money. The volatility (standard deviation) of the stock has been about .15 on an annual basis over the last several years. The options mature in 5 years, and the risk-free rate is 4%.

a. What is the value of Mr. Smith's options?

b. If Mr. Smith earned $500,000 in regular annual salary, why might he prefer to have $1,500,000 in straight salary versus salary and options?

c. Why would the company pay the executive in options as opposed to salary?