Unformatted text preview: A) the size of the firm will decline. B) there are always errors in the estimation of NPVs. C) the option value is negative. D) the company's foregoing the future rights or option to the investment. E) none of the above. Answer: D 5. If Mr. Maxim earned $500,000 in regular annual salary why might why might he prefer to have $1,500,000 in straight salary versus salary and options? Answer: Mr. Maxim likely has a large portion of his wealth tied up in Digital Storage Devices. If he is in a very undiversified position and his pay-off is dependent on the firm stock doing well to make the options pay-off, he is exposed to a large amount of risk. If the stock price falls he will suffer a large decrease in wealth. Mr. Maxim must also wait the 3 year freeze-out period before exercising the options and while price may rise it can also fall drastically....
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- Fall '11
- Derivative, Data storage device, Strike price, Mr. Maxim