1. Your employer offers you a choice between a $5000 bonus and 100 shares of the company stock. Whichever you choose will be awarded today. The stock is currently trading for $63 per share.
a. Suppose that if you receive the stock bonus, you are free to trade it. Which form of the bonus should you choose and 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?
2. You have an investment opportunity in Japan. It requires an investment of $1 million today and will produce a cash flow of ¥ 114 million in one year with no risk. Suppose the risk-free interest rate in the United States is 4%, the risk-free interest rate in Japan is 2%, and the current competitive exchange rate is ¥ 110 per $1. What is the NPV of this investment? Is it a good opportunity?
1. Your employer offers you a choice between a $5000 bonus and 100 shares of the company stock. Whichever you choose will be awarded today. The stock is currently trading for $63 per share.
a. Suppose that if you receive the stock bonus, you are free to trade it. Which form of the bonus should you choose and 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?
2. You have an investment opportunity in Japan. It requires an investment of $1 million today and will produce a cash flow of ¥ 114 million in one year with no risk. Suppose the risk-free interest rate in the United States is 4%, the risk-free interest rate in Japan is 2%, and the current competitive exchange rate is ¥ 110 per $1. What is the NPV of this investment? Is it a good opportunity?
