CEP Equity Award Transactions & Processing Flashcards
6 cards from real CEP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 CEP Equity Award Transactions & Processing flashcards as text
When an employee exercises a nonqualified stock option (NQSO), what is the tax treatment at the time of exercise?
Answer: The spread is treated as ordinary income subject to payroll taxes
For NQSOs, the spread between the fair market value and the exercise price at exercise is recognized as ordinary income and is subject to income and payroll tax withholding.
Which of the following is a same-day sale (cashless) exercise for a stock option?
Answer: The employee exercises and immediately sells enough shares to cover the exercise price and taxes, keeping the remainder
A same-day sale, or cashless exercise, allows the employee to exercise and simultaneously sell shares to cover costs, netting only the after-tax spread.
What is a 'sell-to-cover' RSU release transaction?
Answer: Selling a portion of the vested RSU shares to cover the tax withholding obligation
In a sell-to-cover transaction, the company or broker sells just enough vested RSU shares to satisfy the required tax withholding, and the employee keeps the remaining shares.
Which transaction method allows an optionee to use previously owned shares to pay the exercise price of a stock option?
Answer: Stock swap exercise
A stock swap (or stock-for-stock) exercise lets the optionee tender already-owned shares valued at fair market value to cover the exercise price.
Under a net exercise (net share settlement) of a stock option, how are the shares delivered to the participant?
Answer: Only the net shares representing the spread value, after withholding for taxes and exercise price, are delivered
In a net exercise, the company withholds shares to cover the exercise price and applicable taxes, delivering only the net remaining shares to the participant.
What is the significance of the 'grant date' in the lifecycle of an equity award?
Answer: It is the date from which the vesting schedule begins and fair market value for pricing purposes is established
The grant date establishes the starting point for the vesting schedule and sets the fair market value used to determine the exercise price for options.