Appendix

Black-Scholes Option Pricing Formula
Option #1
Data Inputs:
Market price of stock
Exercise price of option
Stock volatility
Annual risk-free interest rate
Option term (in years)
Stock's dividend yield
Number of Options
Black-Scholes Calculations
Value per Share
Black-Scholes "Delta"
Total Value
Total Delta

Option #2

Option #3

Option #4

$30.00
$30.00
30.0%
6.0%
10 Years
0.00%
10,000

$30.00
$30.00
30.0%
6.0%
10 Years
0.00%
10,000

$30.00
$30.00
30.0%
6.0%
10 Years
0.00%
10,000

$30.00
$30.00
30.0%
6.0%
10 Years
0.00%
10,000

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Hall-Murphy Executive Value Estimates
Option #1
Additional Data Inputs:
Beta
Equity Risk Premium
Executive Wealth ($millions)
% of Wealth in Stock
Execuive Risk Aversion
Executive-Value Calculations
Executive Value per Share
Total Value
Ratio of Exec to BS Value

1.00
6.50%
$5,000,000
50%
rra= 2

Option #2

Option #3

Option #4

1.00
6.50%
$5,000,000
50%
rra= 3

1.00
6.50%
$5,000,000
67%
rra= 2

1.00
6.50%
$5,000,000
67%
rra= 3

(Run "ComputeValue" Macro)
$10.38
$5.95
$103,769
$59,520
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$7.16
$71,569
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$3.30
$33,016
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© Brian Hall and Kevin
© Brian
J. Murphy
Hall and Kevin J. Murphy

Appendix

Executive Options Values Based on Black-Scholes Analysis
Home Depot
2000
2001
2002
2003
2004

Options
1,000,000
2,500,000
1,000,000
750,000
500,000
65,000
500,000
100,000

Issued
Maturity (years)
12/3/2000
10
12/3/2000
14
9/16/2001
10
4/28/2002
10
3/18/2003
10
8/20/2003
10
3/16/2004
10
8/5/2004
10

Strike
40.75
40.75
36.2
46.96
24.55
32.76
36.5
32.9

Stock Price
40.75
40.75
36.2
46.96
24.55
32.76
36.5
32.9

Lowes
2000
2001
2001
2002
2003
2004
2005

160,000
324,000
175,000
216,000
287,000
87,000
72,000

2/2/2000
3/1/2000
2/1/2001
3/1/2002
3/1/2003
3/1/2004
3/1/2005

7
7
7
7
7
7
7

47.13
27.51
45.70
43.99
39.30
56.75
58.35

47.13
27.51
45.70
43.99
39.30
56.75
58.35

Target
2000
2001
2002
2003

750,000
625,000
547,753
270,589

1/10/2001
1/9/2002
1/8/2003
1/14/2004

10
10
10
10

34.00
40.80
30.26
38.25

34.00
40.80
30.26
38.25

Bolded - Assumed issed dates

Volatility

Exhibit 1-A Black-Scholes Valuation of Home Depot Options
12/3/2000

12/3/2000

9/16/2001

4/28/2002

3/18/2003

8/20/2003

3/16/2004

8/5/2004

Data Inputs:
Market price of stock
Exercise price of option
Stock volatility
Annual risk-free interest rate
Option term (in years)
Stock's dividend yield
Annual Dividend
Number of Options

$40.75
$40.75
113.7%
5.0%
10 Years
0.42%
$0.17
1,000,000

$40.75
$40.75
113.7%
5.0%
14 Years
0.42%
$0.17
2,500,000

$36.20
$36.20
35.3%
5.0%
10 Years
0.47%
$0.17
1,000,000

$46.96
$46.96
19.1%
5.0%
10 Years
0.45%
$0.21
750,000

$24.55
$24.55
35.9%
5.0%
10 Years
1.06%
$0.26
500,000

$32.76
$32.76
33.4%
5.0%
10 Years
0.79%
$0.26
65,000

$36.50
$36.50
13.7%
5.0%
10 Years
0.89%
$0.33
500,000

$32.90
$32.90
18.0%
5.0%
10 Years
0.99%
$0.33
100,000

Black-Scholes Calculations
Value per Share
Black-Scholes "Delta"
Total Value
Total Delta

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Exhibit 1-B Black-Scholes Valuation of Lowes Options
2/2/2000
Data Inputs:
Market price of stock
Exercise price of option
Stock volatility
Annual risk-free interest rate
Option term (in years)
Stock's dividend yield
Annual Dividend
Number of Options
Black-Scholes Calculations
Value per Share
Black-Scholes "Delta"
Total Value
Total Delta

3/1/2000

2/1/2001

3/1/2002

3/1/2003

3/1/2004

3/1/2005

$47.13
$47.13
13.8%
5.0%
7 Years
0.07%
$0.04
160,000

$27.51
$27.51
17.4%
5.0%
7 Years
0.13%
$0.04
324,000

$45.70
$45.70
15.6%
5.0%
7 Years
0.08%
$0.04
175,000

$43.99
$43.99
30.0%
5.0%
7 Years
0.09%
$0.04
216,000

$39.30
$39.30
22.1%
5.0%
7 Years
0.13%
$0.05
287,000

$56.75
$56.75
17.0%
5.0%
7 Years
0.12%
$0.07
87,000

$58.35
$58.35
9.93%
5.0%
7 Years
0.17%
$0.10
72,000

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Exhibit 1-C Black-Scholes Valuation of Target Options
1/10/2001
Data Inputs:
Market price of stock
Exercise price of option
Stock volatility
Annual risk-free interest rate
Option term (in years)
Stock's dividend yield
Annual Dividend
Number of Options
Black-Scholes Calculations
Value per Share
Black-Scholes "Delta"
Total Value
Total Delta

1/9/2002

1/8/2003

1/14/2004

$34.00
$34.00
53.9%
5.0%
10 Years
0.65%
$0.22
750,000

$40.80
$40.80
57.4%
5.0%
10 Years
0.54%
$0.22
625,000

$30.26
$30.26
37.6%
5.0%
10 Years
0.79%
$0.24
547,753

$38.25
$38.25
12.8%
5.0%
10 Years
0.68%
$0.26
270,589

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