Which of the following statements is incorrect? Employee stock options
A) are not recorded as an expense when granted if they are at or out-of-the money under the intrinsic value method.
B) will not affect the share price of the company when exercised.
C) may reduce agency costs by more closely aligning interests of stockholders and managers.
D) may increase the risk propensity of managers.
A company's net income is $100,000, and its weighted-average shares outstanding are 20,000. During the year, the company issues 5,000 ESOs at an exercise price of $20.

Question

Quizplus · Accepted Answer

Employee stock options can potentially affect the share price of the company when exercised, as it increases the number of outstanding shares. However, the other statements are correct. Employee stock options are not recorded as an expense when granted if they are at or out-of-the money under the intrinsic value method, they may reduce agency costs by aligning interests, and they may increase the risk propensity of managers.

Additionally:

If all 5,000 ESOs are exercised, the total number of outstanding shares will increase by 5,000. The new weighted-average shares outstanding will be 25,000. Diluted EPS would be calculated as follows: 
Net Income / (Weighted-average shares outstanding + incremental shares from ESOs) = $100,000 / (20,000 + 5,000) = $3.33 per share.

Which of the Following Statements Is Incorrect? Employee Stock Options