Appendix

Black-Scholes Option Pricing Formula

Option #1 Option #2 Option #3 Option #4

Data Inputs:
Market price of stock $30.00 $30.00 $30.00 $30.00
Exercise price of option $30.00 $30.00 $30.00 $30.00
Stock volatility 30.0% 30.0% 30.0% 30.0%
Annual risk-free interest rate 6.0% 6.0% 6.0% 6.0%
Option term (in years) 10 Years 10 Years 10 Years 10 Years
Stock's dividend yield 0.00% 0.00% 0.00% 0.00%
Number of Options 10,000 10,000 10,000 10,000

Black-Scholes Calculations
Value per Share #VALUE! #VALUE! #VALUE! #VALUE!
Black-Scholes "Delta" #VALUE! #VALUE! #VALUE! #VALUE!
Total Value #VALUE! #VALUE! #VALUE! #VALUE!
Total Delta #VALUE! #VALUE! #VALUE! #VALUE!

Hall-Murphy Executive Value Estimates

Option #1 Option #2 Option #3 Option #4

Additional Data Inputs:
Beta 1.00 1.00 1.00 1.00
Equity Risk Premium 6.50% 6.50% 6.50% 6.50%
Executive Wealth ($millions) $5,000,000 $5,000,000 $5,000,000 $5,000,000
% of Wealth in Stock 50% 50% 67% 67%
Execuive Risk Aversion rra= 2 rra= 3 rra= 2 rra= 3

Executive-Value Calculations (Run "ComputeValue" Macro)

Executive Value per Share $10.38 $5.95 $7.16 $3.30
Total Value $103,769 $59,520 $71,569 $33,016
Ratio of Exec to BS Value #VALUE! #VALUE! #VALUE! #VALUE!

© Brian Hall and Kevin

© Brian
J. Murphy
Hall and Kevin J. Murphy
Appendix

Executive Options Values Based on Black-Scholes Analysis

Home Depot Options Issued Maturity (years) Strike Stock Price Volatility
2000 1,000,000 12/3/2000 10 40.75 40.75
2,500,000 12/3/2000 14 40.75 40.75
2001 1,000,000 9/16/2001 10 36.2 36.2
2002 750,000 4/28/2002 10 46.96 46.96
2003 500,000 3/18/2003 10 24.55 24.55
65,000 8/20/2003 10 32.76 32.76
2004 500,000 3/16/2004 10 36.5 36.5
100,000 8/5/2004 10 32.9 32.9

Lowes
2000 160,000 2/2/2000 7 47.13 47.13
2001 324,000 3/1/2000 7 27.51 27.51
2001 175,000 2/1/2001 7 45.70 45.70
2002 216,000 3/1/2002 7 43.99 43.99
2003 287,000 3/1/2003 7 39.30 39.30
2004 87,000 3/1/2004 7 56.75 56.75
2005 72,000 3/1/2005 7 58.35 58.35

Target
2000 750,000 1/10/2001 10 34.00 34.00
2001 625,000 1/9/2002 10 40.80 40.80
2002 547,753 1/8/2003 10 30.26 30.26
2003 270,589 1/14/2004 10 38.25 38.25

Bolded - Assumed issed dates

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 $40.75 $40.75 $36.20 $46.96 $24.55 $32.76 $36.50 $32.90
Exercise price of option $40.75 $40.75 $36.20 $46.96 $24.55 $32.76 $36.50 $32.90
Stock volatility 113.7% 113.7% 35.3% 19.1% 35.9% 33.4% 13.7% 18.0%
Annual risk-free interest rate 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
Option term (in years) 10 Years 14 Years 10 Years 10 Years 10 Years 10 Years 10 Years 10 Years
Stock's dividend yield 0.42% 0.42% 0.47% 0.45% 1.06% 0.79% 0.89% 0.99%
Annual Dividend $0.17 $0.17 $0.17 $0.21 $0.26 $0.26 $0.33 $0.33
Number of Options 1,000,000 2,500,000 1,000,000 750,000 500,000 65,000 500,000 100,000

Black-Scholes Calculations
Value per Share #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE!
Black-Scholes "Delta" #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE!
Total Value #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE!
Total Delta #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE!
Exhibit 1-B Black-Scholes Valuation of Lowes Options

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

Data Inputs:
Market price of stock $47.13 $27.51 $45.70 $43.99 $39.30 $56.75 $58.35
Exercise price of option $47.13 $27.51 $45.70 $43.99 $39.30 $56.75 $58.35
Stock volatility 13.8% 17.4% 15.6% 30.0% 22.1% 17.0% 9.93%
Annual risk-free interest rate 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
Option term (in years) 7 Years 7 Years 7 Years 7 Years 7 Years 7 Years 7 Years
Stock's dividend yield 0.07% 0.13% 0.08% 0.09% 0.13% 0.12% 0.17%
Annual Dividend $0.04 $0.04 $0.04 $0.04 $0.05 $0.07 $0.10
Number of Options 160,000 324,000 175,000 216,000 287,000 87,000 72,000

Black-Scholes Calculations
Value per Share #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE!
Black-Scholes "Delta" #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE!
Total Value #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE!
Total Delta #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! #VALUE!
Exhibit 1-C Black-Scholes Valuation of Target Options

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

Data Inputs:
Market price of stock $34.00 $40.80 $30.26 $38.25
Exercise price of option $34.00 $40.80 $30.26 $38.25
Stock volatility 53.9% 57.4% 37.6% 12.8%
Annual risk-free interest rate 5.0% 5.0% 5.0% 5.0%
Option term (in years) 10 Years 10 Years 10 Years 10 Years
Stock's dividend yield 0.65% 0.54% 0.79% 0.68%
Annual Dividend $0.22 $0.22 $0.24 $0.26
Number of Options 750,000 625,000 547,753 270,589

Black-Scholes Calculations
Value per Share #VALUE! #VALUE! #VALUE! #VALUE!
Black-Scholes "Delta" #VALUE! #VALUE! #VALUE! #VALUE!
Total Value #VALUE! #VALUE! #VALUE! #VALUE!
Total Delta #VALUE! #VALUE! #VALUE! #VALUE!