Dell Computer Corporation †Share Repurchase Program Essay

1. Why do companies white plague rootage creams to compensate employees? What ar the advantages of air options relative to change remuneration? What, if any, are their disadvantages? 2. What, if any, trys do dingles social functionholders typeface from dingles business line option class? Draw term number diagrams to illustrate the adventure. Is this insecurity nighthing that addressholders of dingle tolerate to accommodate when investing in Dell? 3. How does Dell remove, or hedge, the perceived happen of the live nisus options design for shareholders? Draw terminal cave inoff diagrams to illustrate. 4. Why does Dell discharge in both discover and intrust options? Use range-call parity to re clayulate the prepare and call positions that Dell takes in ground of Dells bourgeon and borrowing. What efficaciously does Dells call and sick positions accomplish? Is risk management the primary feather motivation for Dells actions?A course option is an offer by a come with that gives employees the right to demoralize a specified number of shares in the company at an agreed upon equipment casualty (usually lower than commercialise) by a particularised date. The check of granting options to employees is observeed as a full(a) thing beca exercise it (theoretically) aligned the interests of the employees (normally the key executives) with those of the green shareholders. If a material portion of a CEOs salary were in the form of options, she or he would be incited to manage the company well, resulting in a higher stock hurt all over the dogged term. The higher stock price would benefit both the executives and the common shareholders. substitute options is supposed to keep executives eyes on the long term since the potential benefit (higher stock prices) would increase over snip. Also, options programs take in a vesting period (generally several years) before the employee thunder mug actually exercise the options.This is i n contrast to a traditional remuneration program, which is based upon meeting quarterly exertion targets, but these may not be in the best interests of the common shareholders. For example, a CEO who could get a cash bonus based on wages growth may be incited to ascertain spending money on selling or research and development projects. Doing so would meet the short-term performance targets at the expense of a companys long-term growth potential.Stock options creates a financial stake of employees in the libertines growth. The executive stock options allows the employees to participate in the circus tent performance of the potents, incenting them to hammer harder. Although there is a cost associated with the use of employee stock options. The truth holders do not earn same level of returns as they would have if the devoted would not have issued executive stock options to its employee.This loss of return in the form of dilution is the cost that fair play holders have to r epresent for having the employee stock option program. However, this cost is rationalise by the fact that if the market prize of the firms asset decreases, the employee shares the downside as well, thereby absorbing some of the dissemble of the market survey decrease from equity holders. Another cost that the equity shareholders bear is the liquidity cost. The employees are usually pay a higher market value of stock options then they would otherwise possess solely by wages cod to the fact that the options they received cannot be traded or realized until a particular date. The use of executive stock options transfer some of the market risk from the equity holders to the employees thereby reducing the beta of the equity.At the time of compositors case, companies are not required to composing any compensation expense in their publicly filed financial statements when they grant stock options. However, when certain options are exercised, companies receive a tax deduction, which can provide square income tax savings.There are devil arguments that youll comm exactly 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 stark naked shares or go out on the open market and purchase shares. If tender 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 profit cash outflow for the company.Since the impact of the compensation deduction that a corporation can claim for tax purposes is not include in a companys 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 proceeds the stock at at a lower place market val ues if the employees do interchange 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 soften from the full burnt of the downside of a firms scurvy performance while taking a share of the upside benefits also. There is essentially a risk transfer from shareholders to employees through the use of employee stock options. The share holders pay a fair cost to incent employees to be more productive. The executive stock options look to counteract some of the risk that shareholders by nature bear when they buy a stock. hedge the risk of Stock options By issuing employee stock options, Dell presumably takes a short call position on its stock thereby creating a indebtedness to be paid in future. (Appendix shows the bribe diagram of Dells financial obligation because of the employee stock option program.) To hedge the risk associated with the liability Dell is purchasing a 2.8 M call options. This effectively hedges the risk of the executive stock option program back to the shareholders.Dell by harming in the limit and call options is basically equivalent to buying a beforehand contract on its own stock. With the share repurchase program, Dell is also prosecute a strategy of having long call and short put position. Using the put-call parity, (Appendix) the long call and short put accomplishment is equivalent to buying stock by borrowing money. So dells long call and short put transaction is equivalent to a levered share repurchase. As a result of the higher up transaction the risk of having a compounding of long call and short put is higher then that of just having a long call position (employee stock option program), which is transferred to dell shareholders. In this case dell is hedging the risk in the same way as a levered share repurchase program would work by creating more value to the shareholders by increasing the risk borne.I had established the analysis of the Dells proposed stock repurchase program for upto 12 trillion shares and the use of the equity options as part of the repurchase. As per the study available the put-call proceedings along the share repurchase program being employed by Dell would create substantial value for the firm and the shareholders only if management has private information that Dell stock is undervalued and would perform to a higher place expectations in the coming months.