Financial Analysis & Reporting Flashcards
7 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 7 Financial Analysis & Reporting flashcards as text
When analyzing a company's equity award burn rate, what does a higher burn rate generally indicate?
Answer: The company is granting a larger proportion of its shares outstanding as equity awards each year
Burn rate measures the annual share usage of equity awards as a percentage of shares outstanding; a higher rate means greater dilution of existing shareholders.
Under ASC 718, for awards subject to a performance condition, how should the number of awards expected to vest be estimated?
Answer: Estimate the probable outcome and recognize expense based on awards expected to vest
Companies must estimate the probable number of awards that will vest based on their assessment of the performance condition, adjusting expense as estimates change.
How does the capitalization of stock-based compensation expense affect a technology company that capitalizes software development costs?
Answer: A portion of stock-based compensation for developers may be capitalized as part of internally developed software costs
If employees qualifying for capitalization of software development costs receive equity awards, the related stock-based compensation is also capitalized proportionally.
What is 'overhang' in the context of equity compensation analysis?
Answer: The total dilutive potential of all outstanding and reserved equity awards as a percentage of shares outstanding
Overhang represents the potential future dilution from all outstanding awards plus shares available for future grants, expressed as a percentage of total shares outstanding.
A company accelerates vesting of all equity awards upon a change in control (double-trigger). How is the accounting handled for the accelerated expense?
Answer: Remaining unrecognized compensation cost is recognized immediately upon the triggering event
Upon a qualifying change in control triggering acceleration, any remaining unrecognized stock-based compensation expense is recognized immediately.
Which ratio is commonly used by proxy advisory firms to evaluate the total cost of a company's equity compensation plan relative to its market capitalization?
Answer: Shareholder value transfer (SVT) or dilution percentage
Shareholder value transfer (SVT) measures the cost of equity awards as a percentage of market cap, helping proxy advisors assess whether plan costs are reasonable.
When a company repurchases shares on the open market specifically to offset dilution from equity award exercises, how does this affect the diluted share count?
Answer: It reduces dilution but the treasury stock method already accounts for assumed repurchases in the EPS calculation
The treasury stock method in the diluted EPS calculation already assumes proceeds from option exercises are used to repurchase shares at market price, so additional buybacks reduce actual outstanding shares.