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Dear lecturer,
Before my question, I wish to say many thanks to you and the open tuition fraternity.
Now my question is this. If you have 10 directors and 4 of them are expected to leave during the 1st year of the 3 years vested period and 2 also leaving in the 2nd year, why is the 2nd year calculations still having 10-2 directors?
Given that 4 directors have left in the first year, shouldn’t it be 6-2 directors in the 2nd year? I say so because by the 2nd year, it would have been certain (no more estimate or expectation) whether or not those directors have left, and we will therefore have a total of 6-2.
Thanks.
Hi.
In your scenario I estimate that 6 directors are expected to leave over the vesting period.
So there are expected to be 4 at the end.
So my calculation would be based on 4.
And I agree with you. 🙂
(If, at the start of the plan, you estimate 6 leavers, then your year 1 calculation would also be based on 4)
🙂
Thank you for your attention. But if I may restate my question again because I’m not clear yet.
We have 10 directors and estimates that 4 will leave in the 1st year and 2 will also leave in the year 2nd year over a three year period.
Shouldn’t the calculations look like this, especially in year 2:
Year 1
10-4 × number of shares × share price ×1/3Year 2
6-2 × number of shares × share price × 2/3My challenge is that in the lecture, you used the total number of directors throughout the calculations. That is,
Year 1
10-4 × number of shares × share price ×1/3Year 2
10-2 × number of shares × share price × 2/3Thank you.
I think you are looking at OT example 5
Year 1
Estimate of TOTAL NUMBER OF DIRECTORS LEAVING OVER 3 YEAR PERIOD = 4Year 2
Estimate of TOTAL NUMBER OF DIRECTORS LEAVING OVER 3 YEAR PERIOD = 2Your assumption is that:
Estimate of TOTAL NUMBER OF DIRECTORS LEAVING OVER 3 YEAR PERIOD = 6 – this is not correct.The key word is TOTAL.
Does that make sense?
🙂
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