You chair the compensation committee of the board of directors of Androscoggin Copper. A consultant suggests two
Question:
You chair the compensation committee of the board of directors of Androscoggin Copper.
A consultant suggests two stock-option packages for the CEO:
a. A conventional stock-option plan, with the exercise price fixed at today’s stock price.
b. An alternative plan in which the exercise price depends on the future market value of a portfolio of the stocks of other copper-mining companies. This plan pays off for the CEO only if Androscoggin’s stock price performs better than its competitors’.
The second plan sets a higher hurdle for the CEO, so the number of shares should be higher than in the conventional plan. Assume that the number of shares granted under each plan has been calibrated so that the present values of the two plans are the same. Which plan would you vote for? Explain.
Stocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...
Step by Step Answer:
The issue to consider is which plan creates the most appropriate incentive structure in terms ...View the full answer
Principles of Corporate Finance
ISBN: 978-0077404895
10th Edition
Authors: Richard A. Brealey, Stewart C. Myers, Franklin Allen
