When stock options are given to managers as incentives, typically the exercise price of these options is set equal to the firm's:
A) stock price on the day the options are granted.
B) expected stock price in one year from the day the options are granted.
C) expected stock price on the expiration date of the options.
D) none of the above.

Question

Quizplus · Accepted Answer

The exercise price of stock options given to managers is typically set equal to the current stock price on the day the options are granted. This means that the managers would only make a profit if the stock price increases above the exercise price, providing an incentive for them to work towards increasing the company's value. Setting the exercise price at a future expected price or expiration date would not provide the same level of motivation for the managers.

When Stock Options Are Given to Managers as Incentives, Typically