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121 Meeting Template document sample
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TGL Option pricing template
Example in JofA, Jan 96
Values for the case start below
Stock price $46.50 $46.50 $29.00 $29.00 $29.00 $29.00 $29.00 $29.00
Exercise price $50.00 $50.00 $30.00 $30.00 $30.00 $30.00 $30.00 $30.00
term 1 1 2 2 2.25 2.25 2.5 2.5
volatility 30.00% 30.00% 30.00% 30.00% 35.70% 35.70% 39.61% 39.61%
annual rate of of quarterly dividends 0.00% 3.30% 0.00% 0.00% 1.23% 1.23% 1.23% 1.23%
discount rate = bond equivalent rate 8.50% 8.50% 4.00% 7.50% 4.00% 7.50% 4.00% 7.50%
Intermediate computatons
present value of stock, ex dividend 46.5 44.99663 29 29 28.20963 28.20963 28.12315 28.12315
present value of exercise price 46.0045952 46.0046 27.71536 25.89219 27.4423 25.41996 27.17192 24.95633
cumulative volatility 30.00% 30.00% 42.43% 42.43% 53.55% 53.55% 62.63% 62.63%
Call option
proportion of stock present value 57.37% 53.04% 62.51% 68.41% 62.52% 67.80% 64.36% 69.28%
proportion of exercise price PV -45.45% -41.14% -45.81% -52.19% -41.44% -47.08% -39.81% -45.13%
call option value $5.77 $4.94 $5.43 $6.33 $6.27 $7.16 $7.28 $8.22
Life = 2 years Life = 2.25 years Life = 2.5 years
Black-Sholes Option Prices using using using using using using
4% 7.50% 4% 7.50% 4% 7.50%
Volatility: 30%
d-a. no dividend $5.43 $6.33
d-b. 1.23% dividend yield
e fixed dividend
Volatility = 35.68%
e. fixed dividend $6.27 $7.16
Volatility = 39.61% $7.28 $8.22
Use the template above to calculate the remaining values
Q. 1 various reasons, the purpose of stock option plans is to reward managers for exceptional
performance. Changing circumstances may require a change in the plan.
Q 2. alternatives:
increase salary directly
tie compensation to meeting certain performance measures (increase in earnings)
stock appreciation rights
stock purchase plan (ESOP)
Q 3. Stock option plans were developed to provide top management with additional compensation
that (a) is tied to the performance of the company (Company does better, stock price increases, options become more valuable)
(b) stock option plans were developed as a means to increase compensation without having to show any compensation expense
and without the manager having a tax liability until the stock is sold.
This is why over time option plans have changed, as tax law has changed.
Q. 4 See template and table above
Q. 5
Option value
volatility + I.e., as volatility increases, option value increases
dividends -
term +
discount rate +
market price at grant date +
Q. 6
Journal entries, assuming the following:
options expected to vest (50000*.95*.95) 45125
option value 7
expected value on 7/1/96 315875
1-Jul-96 no entry no compensation has been earned
12/31/1996 dr. compensation expense 78968.75
cr. Pic - options 78968.75
dr. deferred tax asset 26849.38
cr. Income tax expense (deferred) 26849.38
12/31/1997 revised turnover expecatation:
options expected to vest (50000*.9*.9) 40500
option value 7
percentage earned to date 0.75
total compensation expense 283500
compenation expense to date 212625
compensation recognized to date -78968.8
compensation expense to be recognized 133656.3
dr. compensation expense 133656.3
cr. Pic - options 133656.3
dr. deferred tax asset 45443.13
cr. Income tax expense (deferred) 45443.13
7/1/1998 options vest, actual amount of expense :
actual number of options: (50000-8000-2,500) 39500
option value 7
total compensation expense 276500
previously recognized -212625
amount to be recognized 63875
dr. compensation expense 63875
cr. Pic - options 63875
dr. deferred tax asset 21717.5
cr. Income tax expense (deferred) 21717.5
Exercise of options: all options excercised
par value 2
exercise price 30
number of options 39500
cash received 1185000
Amount deductible for income tax purposes:
Actual stock price on exercise date 42
exercise price 30
deductible /option excercised 12
total 474000
tax effect 161160 34%
dr. income tax payable 161160
cr. Deferred tax asset 94010
cr. Pic-options 67150
exercise of options:
dr. cash 1185000
dr. pic - options 343650
cr. Common stock 79000
cr. Pic 1449650
Footnote disclosure if company elects to folow APB 25.
Under the 1996 stock option incentive plan the Company granted options for 50,000 shares of common stock.
The exercise price of each is $30 and the maximum term is 2.5 years. The options were granted on july 1, 1996
when the market price of the stock closed at $29. The options will vest on July 1, 1998 and can be excercised
between July 1, 1998 and december 31, 1998
weighted average
weighted average remaining
Fixed options shares exercise price contractual life
outstanding at beginning of the year 0
granted 50000 30
excercised 0
forfeited 0
outstanding at year end 50000 30 2 years
options excercisable at year end 0
weighted average fair value of
options at year end $7.48
The company has elected to account for the options in accordance with APB 25. Consequently no compensation expense
has been recognized. Has FAS 123 been applied, net compensation expense of $55,693 would have been recognized
on an after tax basis. The fair value of each option was determine dusing the Black Sholes option pricing model, based on the
following assumptions: dividend yield of 1.23% for all years, expected volatility of 43.3%, a risk free rate of 4% and an expected term of
2.25 years. A 5% anticipated annual rate of forfeiture was used to estimate that 44,125 options were expected to vest.
The options were anti-dilutive for the purpose of computing earnings per share. Net income under FAS 123 would have been
$8,053,382. Pro forma earnings per common share is $ 5.20
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