Tim Cook receives compensation in the amount 1 million dollars in cash and 1,000 Apple Call options (Employee stock options – each call option represents 100 shares, as usual). These are the only options that he owns in Apple.
It is currently June 1st, 2016 and the options all expire on July 1st, 2016. The current stock price for Apple is 99 dollars and all the options have an exercise price of 100 (S=99, X=100).
Tim Cook is evaluating a project with the following terms:
- 40% chance the project goes well and increases the stock price to 109.
- 50% chance the project does ok and the stock price increase to 101.
- 10% chance the project is a disaster and the stock price plummets to 79.
1) Given his options holdings, what will Tim Cook’s decision be? Will he take the project or not take on the project? What is the expected payout in his options (expected dollar amount he will get) should he take on the project?
2) If he decides to do the project, what are the expected payouts to shareholders (expected dollar amount the stock will go up or down)?
3) Name two ways one could align the decision Tim Cook makes with those of the shareholders