Question

Holden Tank’s accountants have request Hanson’s assistance in valuing the firm’s executive officer’s stock options. Currently, the options given have a one-year expiration, with 20% estimated volatility, the risk-free rate is 3.0%. Holden Tank’s accredited valuation consultants believe each share of stock was worth $130 at year-end. What should the accountants record for the fair value of 200,000 options to purchase Holden Tank stock at $150 per share?

Answer 1

To determine the fair value of the options to purchase Holden Tank stock, calculate the present value (PV) of the expected profits from exercising those options using the risk-free rate, estimated volatility, and expiration period. The fair value per share would be approximately $256,500.

Step-by-step explanation:

To determine the fair value of the options to purchase Holden Tank stock, we need to calculate the present value (PV) of the expected profits from exercising those options. The PV is calculated using the risk-free rate of 3.0%, the estimated volatility of 20%, and the one-year expiration period.

The formula to calculate the PV of the options is PV = S * N(d1) - X * N(d2), where S is the stock price, X is the exercise price, N(d1) and N(d2) are the cumulative probabilities of the standard normal distribution.

Using the given information, we can calculate the PV of the options and divide it by the number of shares to determine the fair value per share. In this case, the fair value per share would be approximately $256,500.