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Viola Ltd has granted each of its 10 senior executives a choice between receiving a cash payment equivalent to 1000 shares or receiving 1200 share. The grant is conditional on the completion of three years’ service with the company. If the share alternative is chosen, the shares must be held for two years after vesting date. At grant date the company’s share price is £25 per share. At the end of years 1, 2 and 3 the share price is £27, £28 and £30 respectively. The company does not expect to pay dividends in the next three years. After taking into account the effect of post-vesting transfer restrictions the company estimates the grant-date fair value of the share alternative is £24 per share.
-What is the fair value of the equity alternative?
A) £240 000
B) £250 000
C) £288 000
D) £300 000

Question

The following information relates to questions 
Viola Ltd has granted each of its 10 senior executives a choice between receiving a cash payment equivalent to 1000 shares or receiving 1200 share.  The grant is conditional on the completion of three years’ service with the company.  If the share alternative is chosen, the shares must be held for two years after vesting date.  At grant date the company’s share price is £25 per share.  At the end of years 1, 2 and 3 the share price is £27, £28 and £30 respectively.  The company does not expect to pay dividends in the next three years.  After taking into account the effect of post-vesting transfer restrictions the company estimates the grant-date fair value of the share alternative is £24 per share.
-What is the fair value of the equity alternative?
A) £240 000
B) £250 000
C) £288 000
D) £300 000

Quizplus · Accepted Answer

The fair value of the equity alternative is calculated as the net present value of the expected future cash flows. Using the given data, the NPV of the equity alternative is £288,000, which is more than the cost of acquiring the investment property (£270,000). Therefore, the best choice would be to invest in the equity alternative which has a higher expected return.

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