Fifteen years ago, in fiscal year 2002, Microsoft granted 254,000,000 stock options to its employees as part of their compensation. The options had an expiration of 10 years and an exercise price of $24.27. Assume that Microsoft’s dividend rate was 0%, its stock volatility was 0.39, the risk-free rate was 5.4%, the price of Microsoft stock on the date of grant was $24.27, and the number of shares outstanding was 10,700,000,000.
If the stock’s volatility was 0.39, then Microsoft’s shares had a two-thirds probability of rising or falling by 39% or less over the next year. If the stock had risen 39% over the next year, what would have been the value of the options granted in question 1, and what would have been the value of the shares granted in question 2? If the stock had dropped 39% over the next year, what would have been the value of these shares and options? Assume that volatility, dividends, and the risk- free rate are unchanged.