I do not get the logic under the following two statement. 1. A higher dividend yield reduces the value of the call option and thus the option expense. 2. Higher discount rate result in higher call option values
This is just option pricing: a) a rising dividend yield is your opportunity cost of holding an option, or thought otherwise it is money being taken out of the firm (a distribution of equity) which reduces the amount to which equity holders have a claim, wither way this reduces the value of the option b) can be confusing, because the statement in this form applies only to call options (i.e. puts actually decrease in value with a rising Rf). This statement is fitting in the given context since firms don’t typically grant put options to employees. The reasoning can be understood by looking at the intrinsic values of the options: Call: S-(K/(1+Rf)) which means that a higher Rf reduces the PV of K thereby increasing the value of the call option and increasing the value of compensation expense (the argument for put options is just the reverse of this since the IV is (K/(1+Rf))-S).