Corp JWK is considering hiring Ms. Andrea as its new CEO. In addition to paying Ms. Andrea $200,000 a year in salary, the company is thinking about offering her an American option to buy 100,000 shares of the company's stock at a time up to and including the maturity time at the price of \$18 per share. The option will expire in six years, and it is not transferrable. Corp JWK's stock is currently trading at $20 per share. Given the existing dividend policy, the public expects the company to pay one dividend of $5 per share in 3 years' time from now, and another dividend of $5 in 7 years from now. We assume that the risk-free interest rate will remain at 5% per annum for the next 10 years and the stock price volatility is 20% per annum. a) If Ms. Andrea will not be allowed to issue additional dividends apart from the two dividends described above, what is the current value of this option? (12 marks) b) If the shareholders are strongly against the company from paying more dividends, shall the company grant Ms. Andrea the right to decide on the dividend policy from year 4 onwards knowing that she owns the stock option described above? Explain why. ( 3 marks) c) If the shareholders are strongly against the company from taking more risky projects over the next 6 years, do you think the board should grant Ms. Andrea the option described above? Explain your answer. ( 2 marks) d) Explain why you can or can't use the same approach you use in a) to price an otherwise similar American Put option. (3 marks) Corp JWK is considering hiring Ms. Andrea as its new CEO. In addition to paying Ms. Andrea $200,000 a year in salary, the company is thinking about offering her an American option to buy 100,000 shares of the company's stock at a time up to and including the maturity time at the price of \$18 per share. The option will expire in six years, and it is not transferrable. Corp JWK's stock is currently trading at $20 per share. Given the existing dividend policy, the public expects the company to pay one dividend of $5 per share in 3 years' time from now, and another dividend of $5 in 7 years from now. We assume that the risk-free interest rate will remain at 5% per annum for the next 10 years and the stock price volatility is 20% per annum. a) If Ms. Andrea will not be allowed to issue additional dividends apart from the two dividends described above, what is the current value of this option? (12 marks) b) If the shareholders are strongly against the company from paying more dividends, shall the company grant Ms. Andrea the right to decide on the dividend policy from year 4 onwards knowing that she owns the stock option described above? Explain why. ( 3 marks) c) If the shareholders are strongly against the company from taking more risky projects over the next 6 years, do you think the board should grant Ms. Andrea the option described above? Explain your answer. ( 2 marks) d) Explain why you can or can't use the same approach you use in a) to price an otherwise similar American Put option
