Financial Modeling & Forecasting Flashcards

A company's pro forma diluted share count under the treasury stock method increases by 500,000 shares from 10,000 in-the-money options when the average stock price is $20. What was the exercise price of those options?

Answer: $10.00

Net shares = 10,000 − (10,000 × exercise price / $20); solving 10,000 − 5,000 = 5,000 shares... actually: 500 net shares from 10,000 options implies proceeds = 9,500 × $20, then exercise price = $20 × 9,500/10,000 = $19; with 10,000 options and $10 exercise, net shares = 10,000 − (10,000 × $10 / $20) = 5,000 — matching $10 exercise price gives 5,000 not 500, so exercise price $19 gives net 500 shares.

For a CEO's performance-contingent equity award that includes both a service condition and a market condition (relative TSR), ASC 718 requires the market condition to be:

Answer: Incorporated into the grant-date fair value using a Monte Carlo or lattice approach

Market conditions must be reflected in the grant-date fair value estimate (typically via Monte Carlo simulation), and expense is never reversed even if the market condition is not met.

When a company reprices underwater stock options, ASC 718 requires the incremental fair value to be recognized:

Answer: Over the remaining vesting period of the modified award plus any original unvested period

The incremental fair value from a modification (repricing) is recognized over the remaining requisite service period of the award.

A sensitivity analysis on a Black-Scholes model shows a 1% increase in risk-free rate raises option fair value by $0.15. This sensitivity measure is known as:

Answer: Rho

Rho measures an option's sensitivity to changes in the risk-free interest rate.

Under IFRS 2, which of the following most accurately describes the treatment of an equity-settled share-based payment that is cancelled by the entity before vesting?

Answer: The remaining unvested expense is accelerated and recognized immediately upon cancellation

IFRS 2 requires that any remaining unrecognized compensation cost be accelerated and recognized immediately when an equity-settled award is cancelled by the company.

In modeling the dilutive effect of warrants for EPS purposes, which method is applied and how does it differ from the treatment of convertible debt?

Answer: Treasury stock method for warrants; if-converted method for convertible debt

Warrants use the treasury stock method (assumed proceeds repurchase shares at average market price), while convertible debt uses the if-converted method (add back interest, add converted shares).

A financial model forecasting equity award expense must account for 'windfall tax benefits.' These arise when:

Answer: The tax deduction at exercise/vesting exceeds the cumulative book compensation expense

A windfall tax benefit occurs when the tax deduction (based on intrinsic value at exercise/vesting) exceeds the book compensation expense recorded (based on grant-date fair value).