You are an activist shareholder that wants to change the management team of a mining company. The company has no debt and therefore faces no risk of default. As an activist shareholder, your main concern is that the company is being poorly managed by the current CEO. The company announced plans to extract and sell 9 tons of gold each year for the next five years. The company plans to sell the mined gold for an uncertain per-ton market price of either $20M USD (50 percent probability) or $60 M USD (50 percent probability). Assume that the cost of extracting each ton of gold is $30M for all years, and that the discount rate for gold mining operations is 3 percent.

E) Suppose that as an activist shareholder you believe that with better management the company would actually produce 10 tons of gold each year, what would be the value of the firm with new management?

F) Given that there are 10M shares outstanding, what would be the new share price of the firm if you were able to replace the CEO with someone more productive?

G) Suppose that the current CEO has stock options with a strike price of $40 USD per share. You suggest that the strike price be raised to $45 USD per share. Using your answer from part (f), briefly explain how raising the strike price would provide incentive alignment.