5 8 0 6 Southern New Hampshire University l. Bonus Versus Stock company\'s stock

Question

5 8 0 6 Southern New Hampshire University l. Bonus Versus Stock company's stock, which has a current stock he company has offered you a $5,000 bonus, which you may receive today, or 100 shares of the price of $50 per share. Mathematically, what is the best choice? Why? What are the advantages and disadvantages of each option? Be sure to support your answers. What would you ultimately choose to do? What is your financial reasoning behind this choice? Consider supporting your answer with quantitative data. B. C. hoEs you discover that the company you are considering working for is rmployee and as a potential shareb

Explanation / Answer

A:If we compare the present value of both options they are the same. However if I need to convert the hundred shares into cash there would be some transaction cost involved which will reduce the present value. So accepting the bonus would be a better choice.

B: The advantage of accepting the bonus is that there is a receipt of immediate cash of $5000 which can be further invested. The disadvantage of accepting the bonus is that I lose the opportunity of gaining in terms of share price and do not get any stake in the business. The advantage of receiving the company's stock is that I get an immediate stake in the business. I also have the company shares without incurring any transaction cost and hence can reap the advantage of increase in the share price. The greatest disadvantage of this option is that the share price of the company may fall which will decrease the value of the money.

C: I would accept $ 5000 bonus. This is because this amount can be invested in bank deposits to receive a greater future value. There is no risk of losing the value of the money due to stock market fluctuations. Assuming a1% transaction cost if I accept the hundred shares and convert it into cash I will only have 5000*99%= 4950 to invest. Hence the value of money will be higher if the bonus is accepted.

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