Question 1

Which of the following was true about employee stock options between 1996 and 2004?
A)The options never had any affect on a company's financial statements
B)The value of options which were at-the-money when issued had to be expensed on the income statement
C)The value of options which were at-the-money when issued had to be reported in the notes to the financial statements
D)Options which were at-the-money when issued did not affect a company's financial statements

Accepted Answer

The value of options had to be reported in the notes to the financial statements between 1996 and 2004.They did not have to be expensed.

Question 2

Which of the following are true of employee stock options?
A)They are commonly valued as though they are regular American options
B)They are commonly valued as though they are regular American options.but with a reduced life
C)They are commonly valued as though they are regular European option
D)They are commonly valued as though they are regular European options but with a reduced life

Accepted Answer

They are commonly valued using Black-Scholes-Merton (i.e.as European options)but with a reduced life to reflect early exercise behavior

Question 3

A company surprises the market with an announcement that it has granted stock options to senior executives.The options are exercised four years later.When does dilution take place?
A)Dilution takes place when the options are exercised
B)Dilution takes place on the announcement date
C)Dilution takes place gradually over the four years
D)There is no dilution

Accepted Answer

Efficient markets should ensure that dilution takes place at the time of the announcement.

Question 4

Which of the following increases the expected life of employee stock options?
A)An increase in the vesting period
B)An increase in employee turnover
C)A fast growth rate for the stock price
D)A tendency for employees to exercise earlier than in the past

Accepted Answer

If the vesting period increases employees must wait longer before they are allowed to exercise.

Question 5

Which of the following is true about the practice of backdating a stock options grant?
A)It is illegal
B)It is illegal in the majority of states in the U.S..but not all states
C)It is illegal in roughly half the states in the U.S.
D)It is unethical.but not illegal

Accepted Answer

Backdating a stock options grant is considered fraud and is illegal. It involves retroactively changing the date of the option grant to a time when the stock price was lower, which can result in significant financial gain for the recipient and mislead investors.

Question 6

Which of the following is NOT true?
A)Management has an incentive to issue executive stock options after bad news
B)Management has an incentive to issue executive stock options before good news
C)Executive stock options encourage management to pursue strategies that are best for the company in the long run
D)Management have an incentive to time the announcement of good news just before they plan to exercise their stock options

Accepted Answer

Executive stock options may incentivize short-term thinking and focus on boosting the stock price in the short run to maximize personal gain, which may not align with the long-term best interests of the company. Therefore, it is not always true that executive stock options encourage management to pursue strategies that are best for the company in the long run.

Question 7

Which of the following was true after 2005?
A)The options never had any affect on a company's financial statements
B)The value of options which were at-the-money when issued had to be expensed on the income statement
C)The value of options which were at-the-money when issued had to be reported in the notes to the financial statements
D)Options which were at-the-money when issued did not affect a company's financial statements

Accepted Answer

After 2005, the Financial Accounting Standards Board (FASB) issued a rule called FAS 123R, which required companies to expense the value of options which were at-the-money when issued on the income statement. This was done to ensure that companies were reflecting the true cost of these options on their financial statements. Options that were out-of-the-money or in-the-money when issued still had to be reported in the notes to the financial statements.

Question 8

Which of the following is NOT usually true about employee stock options?
A)There is a vesting period
B)They can be sold to other employees
C)They are often at-the-money when issued
D)Their value is currently a charge to the income statement

Accepted Answer

Employee stock options cannot usually be sold to other employees. They are usually subject to a vesting period, are often issued at-the-money (meaning the exercise price is equal to the market price of the stock at the time of issuance), and their value is typically a charge to the income statement.

Question 9

Which of the following was true about employee stock options prior to 1995?
A)The options never had any affect on a company's financial statements
B)The value of options which were at-the-money when issued had to be expensed on the income statement
C)The value of options which were at-the-money when issued had to be reported in the notes to the financial statements
D)Options which were at-the-money when issued did not affect a company's financial statements

Accepted Answer

Options which were at the money were assumed to have no cost to a company prior to 1995.

Question 10

When an employee stock option is exercised,which of the following is usually true?
A)The employee pays the market price for the shares and the company refunds the difference between the market price and the strike price
B)The company or the company's agent buys stock in the market for the employee
C)The company issues more shares and sells them to the employee for the strike price
D)The employee cannot immediately sell the shares

Accepted Answer

When an employee stock option is exercised, the company issues more shares and sells them to the employee for the strike price. This dilutes the ownership of existing shareholders.

Question 11

Which of the following is true?
A)An employee stock option is usually held to maturity
B)An employee stock option tends to be exercised earlier than an OTC option with the same terms
C)An employee stock options tends to be exercised later than an OTC option with the same terms
D)Employee stock options are usually exercised as early as possible

Accepted Answer

Employee stock options tend to be exercised earlier than similar exchange-traded options.This is because they cannot be sold and exercising them is the only way to monetize gains.A,C,and D are not true.

Question 12

Which of the following strategies makes no sense?
A)An employee exercises stock options early and sells the stock.No dividends are expected
B)An employee exercises stock options early and keeps the stock.No dividends are expected
C)An employee exercises stock options early and sells the stock.Dividends are expected
D)An employee exercises stock options early and keeps the stock.Dividends are expected

Accepted Answer

An exchange-traded call option on a non-dividend-paying stock should never be exercised early.The only reason for exercising an employee stock option is monetize it.(The option cannot be sold).But to monetize the option the shares of stock that are obtained must be sold.

Question 13

What term is used to describe losses shareholders experience because the interests of managers are not aligned with their own?
A)Agency costs
B)Backdating scandals
C)Dilution
D)Income statement expense

Accepted Answer

Agency costs refer to the losses or expenses incurred by shareholders due to the conflict of interest between them and the company's management. This occurs because managers may prioritize their own interests rather than maximizing shareholder value, leading to a decrease in the company's overall profitability. Backdating scandals refer to the manipulation of stock options by managers, dilution refers to the reduction in shareholder value due to the issuance of new shares, and income statement expense refers to the expenses incurred by the company in order to generate revenue.

Question 14

Which of the following is true about employee stock options after they have been issued?
A)They have to be revalued every year
B)They have to be revalued every quarter
C)They have to be revalued every day like other derivatives
D)They never have to be revalued

Accepted Answer

Employee stock options do not have to be revalued after they have been issued. However, their value may change over time based on various factors such as changes in the stock price or expiration date. It is important for companies to disclose the fair value of these options in their financial statements.

Question 15

Which of the following defines the vesting period?
A)The period during which employee stock options can be exercised
B)The period during which the options are issued
C)The period during which the strike price of the options equals the stock price
D)The period during which employee stock options cannot be exercised

Accepted Answer

The vesting period is the period during which options cannot be exercised.

Question 16

When a CEO has employee stock options,he or she is in theory motivated to do which of the following?
A)Take more risk
B)Take less risk
C)Buy some of the company's stock
D)None of the above

Accepted Answer

When a CEO has employee stock options, they are motivated to take more risks in order to increase the value of the company's stock. This will allow them to exercise their options and make a greater profit.

Question 17

Which of the following ensures that managers are rewarded only when a company performs better than its competitors?
A)A constant strike price for executive stock options
B)A strike price that increases with time
C)A strike price that changes in line with an index of stock prices
D)A strike price that is tied to reported profit

Accepted Answer

Option C is the closest to ensuring that managers are only rewarded when their company performs better than its competitors because the strike price changes in line with an index of stock prices. This means that the manager can only benefit when the company's stock price outperforms the broader market. Option A and B do not consider performance relative to competitors, while option D ties rewards solely to reported profit, which may not reflect overall company performance.

Question 18

Employee stock options are particularly popular with start ups because
A)They encourage employees to work hard
B)The start up cannot afford to pay high salaries
C)The risk associated with the company's success is shared with employees
D)All of the above

Accepted Answer

Employee stock options offer a number of benefits to start ups, including incentivizing employees to work harder, providing a cost-effective way to compensate employees when the company doesn't have the resources to offer high salaries, and aligning the interests of employees with those of the company by sharing the risk of the company's success. Therefore, all of the above options are correct.

Question 19

When an employee leaves the company which of the following is usually true?
A)All outstanding employee stock options are forfeited
B)Out-of the money employee stock options are forfeited
C)All options which have vested are forfeited
D)All options are retained

Accepted Answer

Out-of-the-money employee stock options are usually forfeited when an employee leaves the company. This is because these options have no value and are not beneficial to the employee. However, any options that are in-the-money (meaning the stock price is higher than the exercise price) may be exercised before leaving the company. Any vested options should also be exercised or forfeited according to the plan's rules.

Question 20

Which of the following hypotheses is supported by empirical research?
A)The grant date for executive stock options tends to be when the stock price is high
B)The grant date for executive stock options tends to be when the stock price is low
C)The grant date for executive stock options tends to be after a growth spurt in the stock price
D)The is no relationship between the timing of grants and the stock price

Accepted Answer

The answer of Which of the following hypotheses is supported...

Quiz 14: Employee Stock Options

Which of the following was true about employee stock options between 1996 and 2004?

Which of the following are true of employee stock options?

A company surprises the market with an announcement that it has granted stock options to senior executives.The options are exercised four years later.When does dilution take place?

Which of the following increases the expected life of employee stock options?

Which of the following is true about the practice of backdating a stock options grant?

Which of the following is NOT true?

Which of the following was true after 2005?

Which of the following is NOT usually true about employee stock options?

Which of the following was true about employee stock options prior to 1995?

When an employee stock option is exercised,which of the following is usually true?

Which of the following is true?

Which of the following strategies makes no sense?

What term is used to describe losses shareholders experience because the interests of managers are not aligned with their own?

Which of the following is true about employee stock options after they have been issued?

Which of the following defines the vesting period?

When a CEO has employee stock options,he or she is in theory motivated to do which of the following?

Which of the following ensures that managers are rewarded only when a company performs better than its competitors?

Employee stock options are particularly popular with start ups because

When an employee leaves the company which of the following is usually true?

Which of the following hypotheses is supported by empirical research?