公司理财Chapter_14

1、014Options and Corporate Finance1Key Concepts and Skills Understand the options terminology Be able to determine option payoffs and pricing bounds Understand the five major determinants of option value Understand employee stock options Understand the various managerial options Understand the differe

2、nces between warrants and traditional call options Understand convertible securities and how to determine their value2Chapter Outline Options: The Basics Fundamentals of Option Valuation Valuing a Call Option Employee Stock Options Equity as a Call Option on the Firms Assets Options and Capital Budg

3、eting Options and Corporate Securities3Option Terminology Call Put Strike or Exercise price Expiration date Option premium Option writer American Option European Option4Stock Option Quotations Look at Table 14.1 in the book Price and volume information for calls and puts with the same strike and exp

4、iration is provided on the same line Things to notice Prices are higher for options with the same strike price but longer expirations Call options with strikes less than the current price are worth more than the corresponding puts Call options with strikes greater than the current price are worth le

5、ss than the corresponding puts5Option Payoffs Calls The value of the call at expiration is the intrinsic value Max(0, S-E) If SE, then the payoff is S E Assume that the exercise price is $306Option Payoffs - Puts The value of a put at expiration is the intrinsic value Max(0, E-S) If SE, then the pay

6、off is 0 Assume that the exercise price is $307Work the Web Example Where can we find option prices? On the Internet, of course. One site that provides option prices is Yahoo Finance Click on the web surfer to go to Yahoo Finance Enter a ticker symbol to get a basic quote Follow the options link Che

7、ck out “symbology” to see how the ticker symbols are formed8Call Option Bounds Upper bound Call price must be less than or equal to the stock price Lower bound Call price must be greater than or equal to the stock price minus the exercise price or zero, whichever is greater If either of these bounds

8、 are violated, there is an arbitrage opportunity9Figure 14.210A Simple Model An option is “in-the-money” if the payoff is greater than zero If a call option is sure to finish in-the-money, the option value would be C0 = S0 PV(E) If the call is worth something other than this, then there is an arbitr

9、age opportunity 11What Determines Option Values? Stock price As the stock price increases, the call price increases and the put price decreases Exercise price As the exercise price increases, the call price decreases and the put price increases Time to expiration Generally, as the time to expiration

10、 increases both the call and the put prices increase Risk-free rate As the risk-free rate increases, the call price increases and the put price decreases12What about Variance? When an option may finish out-of-the-money (expire without being exercised), there is another factor that helps determine pr

11、ice The variance in underlying asset returns is a less obvious, but important, determinant of option values The greater the variance, the more the call and the put are worth If an option finishes out-of-the-money, the most you can lose is your premium, no matter how far out it is The more an option

12、is in-the-money, the greater the gain The owner of the option gains from volatility on the upside, but dont lose anymore from volatility on the downside13Table 14.214Employee Stock Options Options that are given to employees as part of their benefits package Often used as a bonus or incentive Design

13、ed to align employee interests with stockholder interests and reduce agency problems Empirical evidence suggests that they dont work as well as anticipated due to the lack of diversification introduced into the employees portfolios The stock isnt worth as much to the employee as it is to an outside

14、investor because of the lack of diversification this suggests that options may work in limited amounts, but not as a large part of the compensation package15Equity: A Call Option Equity can be viewed as a call option on the companys assets when the firm is leveraged The exercise price is the face va

15、lue of the debt If the assets are worth more than the debt when it comes due, the option will be exercised and the stockholders retain ownership If the assets are worth less than the debt, the stockholders will let the option expire and the assets will belong to the bondholders16Capital Budgeting Op

16、tions Almost all capital budgeting scenarios contain implicit options Because options are valuable, they make the capital budgeting project worth more than it may appear Failure to account for these options can cause firms to reject good projects17Timing Options We normally assume that a project mus

17、t be taken today or forgone completely Almost all projects have the embedded option to wait A good project may be worth more if we wait A seemingly bad project may actually have a positive NPV if we wait due to changing economic conditions We should examine the NPV of taking an investment now, or in

18、 future years, and plan to invest at the time that the project produces the highest NPV18Example: Timing Options Consider a project that costs $5000 and has an expected future cash flow of $700 per year forever. If we wait one year, the cost will increase to $5500 and the expected future cash flow w

19、ill increase to $800. If the required return is 13%, should we accept the project? If so, when should we begin? NPV starting today = -5000 + 700/.13 = 384.62 NPV waiting one year = (-5500 + 800/.13)/(1.13) = 578.62 It is a good project either way, but we should wait until next year19Managerial Optio

20、ns Managers often have options after a project has been implemented that can add value It is important to do some contingency planning ahead of time to determine what will cause the options to be exercised Some examples include The option to expand a project if it goes well The option to abandon a p

21、roject if it goes poorly The option to suspend or contract operations particularly in the manufacturing industries Strategic options look at how taking this project opens up other opportunities that would be otherwise unavailable20Warrants A call option issued by corporations in conjunction with oth

22、er securities to reduce the yield required on the other securities Differences between warrants and traditional call options Warrants are generally very long term They are written by the company and exercise results in additional shares outstanding The exercise price is paid to the company, generate

23、s cash for the firm and alters the capital structure Warrants can normally be detached from the original securities and sold separately Exercise of warrants reduces EPS, so warrants are included when a firm reports “diluted EPS”21Convertibles Convertible bonds (or preferred stock) may be converted i

24、nto a specified number of common shares at the option of the bondholder The conversion price is the effective price paid for the stock The conversion ratio is the number of shares received when the bond is converted Convertible bonds will be worth at least as much as the straight bond value or the c

25、onversion value, whichever is greater22Valuing Convertibles Suppose you have a 10% bond that pays semiannual coupons and will mature in 15 years. The face value is $1000 and the yield to maturity on similar bonds is 9%. The bond is also convertible with a conversion price of $100. The stock is currently selling for $110. What is the minimum price of the bond? Straight bond value = 1081.44 Conversion ratio = 1000/100 = 10 Conversion value = 10*