1. (15 pts) Because of your performance at work, your manager offers you a choice between $5,000 cash (cash bonus) and 100 shares of the company stock (stock bonus). Whichever one you choose will be awarded today. The stock is currently trading for $55 per share.
a. If you decide to receive the stock bonus, you are free to trade it immediately. Which form of the bonus should you choose – the stock bonus or cash bonus? What is its value today? (7 pts)
stock: 100*55=5,500 > bonus: 5,000
Choose stock bonus
b. If you decide to receive the stock bonus, you are required to hold it for one year. Would your decision change or not? How do you justify your decision? Assume that the one-year risk-free rate is 10%. (8 pts)
55/1.1=50
The stock market is changing, price of the stock after one year might be higher or lower than $55.
If the price is greater than $55 one year later, we should still choose stock.
If the price is less than $55 on year later, we should choose cash instead.
If the price is equal to $55 on year later, cash and stock bonus are the same.
