Chapter 23 - Options and Corporate Finance, Extensions and A

Chapter 23 - Options and Corporate Finance, Extensions and...

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Chapter 23 Options and Corporate Finance – Extensions and Applications: 23.1 Executive Stock Options Why Options? o besides long-term compensation, annual bonuses and retirement contributions, options are most commonly used as compensation for executives o because they make them share the stockholders’ interests →better decisions for the benefit of shareholders o lower base salary o put an executive’s pay at risk, rather than guaranteeing it independent of the performance of the firm o tax-efficient – taxed when exercised Valuing Executive Compensation o freeze-out period – diminishes the value of a standard option o dividends – lower the value of a call option o while CEO is wealthy by most standards, a shift in the stock will have impact on well being - thus CEO is connected with firm o freezing the options so that they cannot be sold yields long term commitment by CEO o since CEO is forced to be undiversified → total value of the position is worth less
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This note was uploaded on 11/16/2009 for the course F 3033 taught by Professor Hh during the Spring '09 term at Maastricht.

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Chapter 23 - Options and Corporate Finance, Extensions and...

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