This is a paper that is focusing on the Financial Securities Analysis in Ocean Cuisines plc. The paper also divides the assignment into parts for easier analysis of the topic question.
Financial Securities Analysis in Ocean Cuisines plc
Financial Securities Analysis
You have taken a management position in Ocean Cuisines plc that just went public last year. The company’s restaurants specialize in seafood dishes. A concern you had was that the restaurant business is risky.
During your interview process, one of the benefits you heard was an employee stock option. Upon signing your employment contract, you obtained options with a strike price of £65 for 10,000 shares of company stock. As is fairly common, your stock options have a three-year vesting period and a 10-year expiration, meaning that you cannot exercise the options for a period of three years and you lose them if you leave before they vest.
So your employee stock options are European for the first three years and American afterward. You cannot sell the option nor can you enter into any sort of hedging. Ocean Cuisines is currently trading at £40 per share, a slight increase from the initial offering price last year. You estimated that the annual average standard deviation for restaurant company stock is 20 percent. Since Ocean Cuisines is a new restaurant chain you decide to use a 25percent standard deviation in your calculations. A three-year Treasury note currently has a yield of 3.4% and 10 year Treasury note has an yield of 6%.
1. Firstly, suppose that in three years, company’s stock is trading at £55. At that time, should you keep the options or exercise immediately? What are some of the important determinants in making such a decision?
2. Secondly, you are trying to value your option. What minimum value would you assign? What is the maximum value you would assign?
Total word count of part 1 – 500 words
Managers regularly buy derivatives on currencies, interest rates and commodities to limit down side risk. In this context discuss the pros and cons of hedging airline fuel costs by the airline companies.
Total word count of part 2 – 1250 words
Select a unique public limited company and examine whether its share is overpriced, under-priced or fairly priced and recommend to BUY HOLD or SELL. Application of Capital Asset Pricing Model is required in this section.