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21 February, 18:26

Suppose your employer offers you a choice between a $ 4 comma 600 bonus and 200 shares of the company stock. Whichever one you choose will be awarded today. The stock is currently trading for $ 64 per share. Ignore transaction costs. a. Suppose that if you receive the stock bonus, you are free to trade it. Which form of the bonus should you choose? What is its value? b. Suppose that if you receive the stock bonus, you are required to hold it for at least one year. What can you say about the value of the stock bonus now? What will your decision depend on?

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  1. 21 February, 19:46
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    a. Suppose that if you receive the stock bonus, you are free to trade it. Which form of the bonus should you choose? What is its value?

    I would choose the stock bonus because the current market price = 200 x $64 = $12,800 which is much higher than $4,600 (cash bonus)

    b. Suppose that if you receive the stock bonus, you are required to hold it for at least one year. What can you say about the value of the stock bonus now? What will your decision depend on?

    Even if you are required to hold the stock for one year, the price difference with the cash bonus is too great = ($12,800 - $4,600) / $4,600 = 178% higher. Since you are employed by the company, you should know if the company is doing well or not, and the probable future stock price.

    Only if something catastrophic happened to the company would make the cash bonus more attractive.
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