Dell Computer Corporation – Share Repurchase Program Questions: 1. Why do companies use stock options to compensate employees? What are the advantages of stock options relative to cash compensation? What, if any, are their disadvantages? 2. What, if any, risks do Dell’s shareholders face from Dell’s stock option program? Draw terminal payoff diagrams to illustrate the risk. Is this risk something that shareholders of Dell expect to bear when investing in Dell? 3. How does Dell remove, or hedge, the perceived risk of the stock options program for shareholders? Draw terminal payoff diagrams to illustrate. 4. Why does Dell transact in both call and put options? Use put-call parity to reformulate the put and call …show more content…
However, when certain options are exercised, companies receive a tax deduction, which can provide significant income tax savings. There are two arguments that you'll commonly find against the use of stock options: Dilution of ownership and overstatement of operating income. When an employee exercises her stock options, the company has to either issue new shares or go out on the open market and purchase shares. If new shares are issued, then your ownership is diluted. If the company purchases shares on the open market, then the company, which only receives the exercise price from the employee, has to pay market price for the shares it purchases. This results in a net cash outflow for the company. Since the impact of the compensation deduction that a corporation can claim for tax purposes is not included in a company's GAAP income, many take the view that using options enables the company to overstate its income. Risks to Dell shareholders: Dell Share holders bear the risk in the form of cost of potentially issuing the stock at below market values if the employees do convert the options into stock when the options are in-the-money. However, if the options expires out of the money, the shareholders realize equally better benefits. In this case, the firm obtains labor from employees without having paid for the labor by issuing shares. The employee stock options provides a cushioning from the full burnt
4. What are the advantages and disadvantages of the 1987 buyout, viewed as a financial program?
If Ms. Jameson chooses stock options for her compensation, she will not need to pay taxes until she actually exercises them and sells the shares. At that point, gains on the shares will be taxed at either ordinary tax rate[3] or at capital gain tax rate[4], depending on whether she has held the stock for less than or more than one year after exercising the options. If taxes are considered, the value of option after tax will decrease. In the case that Ms. Jameson holds stocks for less than 1 year, she risks to her income tax rate that could be changed at the fifth year. While there will be no risk regarding tax rate, if she hold the stocks for more than 1 year. The latter case, however, increases risk regarding the share price in the future, in which it will have an effect on her capital gain or loss.
As for the combination of cash and new shares, shareholders can take part of their money
Problem 1.14. Suppose that a June put option on a stock with a strike price of $60 costs $4 and is held until June. Under what circumstances will the holder of the option make a gain? Under what circumstances will the option be exercised? Draw a diagram showing how the profit on a short position in the option depends on the stock price at the maturity of the option.
List four different cost objects for Dell. For each cost object, mention one example of a direct and indirect cost.
The advantages of Dells model are: The internet allows Dell an extensive scope and reach for its products at a relatively low price (Dedrick and Kraemer 2001). Using the internet Dell has been able to automate many of its business functions, such as product configuration, order entry and technical support (Dedrick & Kraemer 2001), therefore the company can achieve higher revenues without customer service costs increasing greatly. Online configuration ensures that the customer gets exactly what they want. Dells build to order strategy means that inventory levels are low, they only hold approximately 4-8 days of stock, therefore inventory costs are low (Breen 2004).
10. Stock options provide the holder with an option to acquire a specified number of shares in a corporation under prescribed conditions and within a stated future time period. Options that are issued as an attachment to other securities are called stock warrants. Warrants may trade separately while options do not. Options often have a limited life while warrants often have no expiry date.
In this paper, Team C will describe the relationship between strategic planning and financial planning for Dell Corporation. The first section will cover Dell’s strategic planning initiative and identify a strategic initiative discussed in the organization’s annual report; from this report Team C will describe how this initiative affects Dell’s financial planning. Team C will break down and address how Dell’s initiative directly affects costs and the sales of the company’s financial plan. The final section, Team C will describe the risks associated with the initiative and the financial impact that these risks have on the company.
The net present value (NPV) of each option has been calculated and included in Table 1, based on figures from the study group report. Unfortunately, these figures are flawed in the same manner as Wriston’s current performance and accounting mechanisms in that they don’t properly allocate revenue, nor do they recognize inherent manufacturing complexities. The plant closure option’s expected operational gain seems particularly suspect. A better valuation of the new plant options is perhaps
Dell positioned itself as a successful differentiator; however, its competitive differentiation is no longer an advantage for it due to the ease of their Direct Model imitation.
Question 11- What is the analogy Martin is trying to draw with options? What is the "stealth tier"? What is the unit of analysis? What is the underlying asset price? Strike price? Volatility?
Essay 1 : Introduction to Dell 3 Parts - Look at the Business Model in Particular (Is it fit for purpose?) – Then the Ecosystem – The Modularization and mention licensing Look the Paradigm of Dell Conclusion
* The Board of Directors should approve the proposed option trading policy and should choose buying a call option on a listed stock as their option investment strategy.
The most important questions facing Dell was – how to grow and at what cost. The purpose of this research is to analyze Dell’s core strategy, its working capital management, and come up with a plan to finance its future growth by evaluating its financial statements.
Stock options provide a financial incentive to employees. If the company does well, then the employees benefit financially. Providing this benefit has the effect of the employee having a vested interest in how the company performs; therefore, the employee will work hard, do their best work, and stay