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fm15 3 - The last step is to divide the value of equity by...

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Answers and Solutions: 15 - 3 g. A stock option allows its owner to purchase a share of stock at a fixed price, called the strike price, no matter what the actual price of the stock is. Stock options always have an expiration date, after which they cannot be exercised. A restricted stock grant allows an employee to buy shares of stock at a large discount from the current stock price, but the employee is restricted from selling the stock for a specified number of years. An Employee Stock Ownership Plan, often called an ESOP, is a type of retirement plan in which employees own stock in the company. 15-2 The first step is to find the value of operations by discounting all expected future free cash flows at the weighted average cost of capital. The second step is to find the total corporate value by summing the value of operations, the value of nonoperating assets, and the value of growth options. The third step is to find the value of equity by subtracting the value of debt and preferred stock from the total value of the corporation.
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Unformatted text preview: The last step is to divide the value of equity by the number of shares of common stock. 15-3 A company can be profitable and yet have an ROIC that is less than the WACC if the company has large capital requirements. If ROIC is less than the WACC, then the company is not earning enough on its capital to satisfy its investors. Growth adds even more capital that is not satisfying investors, hence, growth decreases value. 15-4 Entrenched managers consume to many perquisites, such as lavish offices, excessive staffs, country club memberships, and corporate jets. They also invest in projects or acquisitions that make the firm larger, even if they don’t make the firm more valuable. 15-5 Stock options in compensation plans usually are issued with a strike price equal to the current stock price. As long as the stock price increases, the option will become valuable, even if the stock price doesn’t increase as much as investors expect....
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