Question

Case: Superconductor Technologies, Inc.

This case describes the compensation and incentive plans used by a high-technology company for its top-30 managers. The company is unusual in that it has been in business for 17 years, yet has never earned a profit. As such, it can still be viewed as a start-up company, but a mature one. The compensation packages consist of base salary, cash bonuses, and stock options. The case provides opportunities to discuss issues, such as measurements, style of evaluations, and payout leverage, related to, particularly, the bonus and stock option components of these packages, as well as the entire compensation system.

Questions:

1. Assume that you, as an STI employee, were awarded options on 1,000 shares of STI stock today at the current market price.
   1. Without doing a detailed numerical calculation, make your best-guess estimate as to the economic value of this option grant. What factors did you consider in making your estimate?
   2. Would this option grant likely affect any of your behaviors? If so, how?
2. Should the accounting rule change requiring the immediate expensing of the value of stock options granted (which has now happened) cause STI to make any changes to its system? If so, which?
3. Will STI have to make changes to its system when it expands internationally and employs managers in locations such as London and Shanghai? If so, which?

Submit your response in 2-3-pages, Include a cover page and a reference page. When citing sources, please use proper APA citing and reference techniques.

Answer 1

1. Volatility - It measure how much the stock prices varies from day to day. It undergo larger and more frequent price changes than non-volatile stocks. A small change in the volatility estimate can have a significant impact on the price of an option.
2. Looking at the broad market trends that will push up the profits of a particular company. Figure out the company that is best positioned to capitalize a broad trend.
3. Analysing the company by leadership, Are the leaders good? Are they trustworthy? How long have they been with the company? Whether it is a small company or big; always want to invest in the leaders.
4. Based on the past price trends
5. Social analysis - If the STI stocks are popular accordingly, estimate the price range.

Yes, it'll affect the behaviour. where one need to watching the market regularly. If we classify investing based on average time invested in a particular stock, then we would have four broad categories:

1. Day traders – average time invested in a stock ranges from few minutes to maximum 1 day.
2. Short term – average time of 1 day to 1 year
3. Medium term – average time of 1 year to 9 years
4. Long term – average time of more than 10 years

Prsopect theory - This theory, contributed by Daniel Kahneman which won him Noble prize for economics in 2002. As per the theory, the possibility of loss has twice the psychological impact than a gain. More psychological impact means more stress. The amount of stress is very low if we incur a loss of Rs 100,000/- in a single shot as compared to the stress we go through if we incurr a loss of Rs 1000/- each day for 100 days.