Question 1

________ stock is stock whose sale or acquisition is subject to restrictions imposed by securities laws.

Accepted Answer

Restricted stock is subject to restrictions imposed by securities laws which may include limitations on when it can be bought or sold or the amount that can be sold at a given time. Encumbered stock refers to stock that has been pledged as collateral for a loan and may also have restrictions on its sale. Contingent and vested stock do not necessarily have restrictions imposed by securities laws.

Question 2

When by law could U.S.companies first offer stock options to employees?

Accepted Answer

U.S. companies could first offer stock options to employees in 1950, which is not listed among the choices.

Question 3

What does the 2004 rule of the Financial Accounting Standards Board require regarding the reporting of stock option awards?

Accepted Answer

The 2004 rule of the Financial Accounting Standards Board requires that stock option awards be treated as an expense and included in the financial statements. This is known as the "share-based payment" or "stock options" accounting standard, also referred to as FASB ASC Topic 718. Disclosing in footnotes is no longer sufficient; the actual expense must now be recorded on the income statement.

Question 4

To receive favorable tax treatment when buying shares in an employee stock purchase plan,an employee can own no more than ____ of the voting power of the employer or ____ of the value of all shares of stock of the employer.

Accepted Answer

According to the IRS, in order for an employee to receive favorable tax treatment when purchasing shares in an employee stock purchase plan, the employee must not own more than 5% of the voting power of the employer or 5% of the value of all shares of stock of the employer. Therefore, choice A is the correct answer.

Question 5

Who is responsible for setting the compensation of corporate officers?

Accepted Answer

The compensation of corporate officers is usually determined by the board of directors, as they are responsible for overseeing the management and operations of the corporation. While the shareholders have a say in any major decisions made by the company, including executive compensation, ultimately it is the board of directors who have the authority to set the compensation of corporate officers. The president of the corporation and the chief executive officer may have input or make recommendations, but the final decision typically lies with the board of directors.

Question 6

The exercise of a(n)________ stock option generally entitles a company get to take a deduction from its earnings without further considerations.

Accepted Answer

Nonqualified stock options allow a company to take a tax deduction equal to the difference between the exercise price and the market price at the time of exercise.

Question 7

An employee stock purchase plan must provide that no employee can accrue the right at any time to purchase more than ________ of stock per calendar year,valued at the fair market value of such stock.

Accepted Answer

Under IRS regulations, an employee stock purchase plan (ESPP) must limit the maximum amount of stock an employee can purchase to $25,000 per calendar year, based on the fair market value of the stock at the time the option is granted.

Question 8

Which of the following allows employees to defer a portion of their salaries on a pretax basis into an investment fund set up by the company?

Accepted Answer

401(k) plans allow employees to defer a portion of their salaries on a pretax basis into an investment fund set up by the company. 250(b) plans, employee stock ownership plans, and employee investment plans are other types of retirement plans, but they do not offer the same benefits as a 401(k) plan.

Question 9

Which of the following is a federal law regulating pension plans and many types of employee benefit plans?

Accepted Answer

The Employee Retirement Income Security Act, also known as ERISA, is a federal law that regulates pension plans and many types of employee benefit plans. This law sets standards for the administration and management of these plans, including requirements for reporting, disclosure, and fiduciary responsibilities.

Question 10

ERISA provides that officers and trustees of a pension plan are

Accepted Answer

ERISA (Employee Retirement Income Security Act) designates officers and trustees of a pension plan as fiduciaries, meaning that they have a legal duty to act in the best interest of the plan participants and beneficiaries. They have a responsibility to manage the plan’s assets prudently and ensure that the plan is operating in compliance with ERISA regulations.

Question 11

What are the principal federal act(s)regulating securities transactions and issuers?

Accepted Answer

The principal federal acts regulating securities transactions and issuers are the Securities Act of 1933 and the Securities Exchange Act of 1934. The mentioned acts in the options do not exist.

Question 12

A principal kind of stock option is a(n)

Accepted Answer

Nonqualified stock options are the most common type of stock options granted to employees. They are usually given as compensation and provide the employee with the right to purchase company stock at a predetermined price, called the strike price.  These options are taxable as ordinary income when they are exercised, and the difference between the strike price and the fair market value of the stock is taxed as ordinary income. The other options listed (B and C) are not commonly used.

Question 13

In a ________ retirement plan,the employer guarantees the employee a specific payment regardless of the total contributions made to the plan or the plan's investment performance.

Accepted Answer

In a defined benefit retirement plan, the employer specifies a particular benefit amount that will be paid to the employee upon retirement, based on a formula that takes into account factors such as the employee's salary and years of service. The employer is responsible for funding the plan and assumes the investment risk, so the employee is guaranteed a specific payment regardless of how the plan's investments perform.

Question 14

Which of the following in true regarding standard(s)set by the Sarbanes-Oxley Act pertaining to compensation committees?

Accepted Answer

The Sarbanes-Oxley Act does not specifically address the composition of compensation committees. It focuses more on financial reporting and auditing processes.

Question 15

A ________ gives the person to whom it is granted the right to buy a certain number of shares at a fixed price for a fixed number of years.

Accepted Answer

A stock option is a contract that grants the holder the right, but not the obligation, to buy or sell a particular stock at a fixed price for a fixed period of time. In this case, it would give the person the right to buy a certain number of shares at a fixed price for a fixed number of years. The other answer choices are not relevant to the concept of stock options.

Question 16

The ________ is the price at which an optionee can exercise stock options by purchasing stock.

Accepted Answer

The strike price is the price at which the owner of an option can exercise their right to buy or sell underlying assets, such as stock. It is also known as the exercise price. The other answer choices are not commonly used terms in the context of stock options.

Question 17

ERISA does not

Accepted Answer

ERISA does not establish maximum funding requirements; it sets minimum funding standards for pension plans to ensure they have enough assets to pay promised benefits.

Question 18

By filing an election under Section 83(b)of the Internal Revenue Code within thirty days of exercising an option to purchase shares subject to a restricted plan

Accepted Answer

By filing an election under Section 83(b) of the Internal Revenue Code within thirty days of exercising an option to purchase shares subject to a restricted plan, an employee elects to pay tax at the time the stock is purchased in an amount equal to what would be due if the stock were not subject to vesting. This allows the employee to potentially realize long-term capital gains when the shares are sold in the future.

Question 19

Which of the following is a principal requirement of an employee stock purchase plan?

Accepted Answer

The principal requirement of an employee stock purchase plan is that it must be implemented after shareholder approval. While including all groups of employees (including part-time employees) and allowing transferability of purchased stocks are also important considerations, they are not the principal requirement. Therefore, options A and C are incorrect. Option D is incorrect because not all of the responses are correct.

Question 20

A(n)________ gives an employer the right to recoup some or all of an employee's stock option gain if he or she goes to work for a competitor within a certain period of time following exercise of the option.

Accepted Answer

A clawback provision allows an employer to reclaim some or all of an employee's stock option gain if certain conditions are met, such as the employee leaving the company to work for a competitor. This is a common provision in stock option agreements. Choices A, B, and D are not accurate terms for this type of provision.

Quiz 14: executive compensation and employee benefits