Based on response to 3-4 Finance question below, providecomments to the response

Question

Based on response to 3-4 Finance question below, providecomments to the response.

3-4. Suppose your employer offers you a choice between a$5000 bonus and 100 shares of the company stick. Whicheverone you choose will be awarded today. The stock is currentlytrading for $63 per share. If you are free to trade itimmediately, which form of bonus should you choose and what is itsvalue? If you are required to keep the stock for a year, whatwill your decision depend on?

Response:

The bonus value is $5000 dollars and the stock value is $6300dollars. The stock looks really good right now since you are ableto trade it today and come out with $1300 extra dollars. But, youhave to count in the transaction costs of selling the 100 shares.If the cost of selling the shares is >= $1300 today, then takethe bonus. If it is less, then take the shares because it has ahigher net value.
If you are required to keep the stock for a year, the decisionbecomes more involved. Since you work for the company, you havesome “inside information”, where the company isheading, hearsays, current and future projects and businessdevelopment. You will still want to look at the financialstatements of the company (balance sheet, income statement,…) and how it is doing. I am a firm believer at looking atthe whole picture as well. Look at the company’s competitorsand what they are doing, the markets that your company is in, worldtrends in these markets, economic conditions, and even politicalissues. All of this information can affect your decision. You couldalso say, “Hey, if I take the $5000 cash now, I can performthe same analysis on another company, invest the $5000 in theirstock and come out even better than getting my own company’sstock at $6300 now”.

Explanation / Answer

On the face of it the obvious answer seems like " Go for the Stock. " However there are manyfactors affecting the decision. 1. The amount of dividends& their present equivalents. 2. Transaction costs , ifthey exceed 1300, it's not worth going for the stock 3. The whole finacialpicture that is stability of the company, growth rate etc. Just look at the wholepicture before coming to a decision.

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.