Financial Modeling & Forecasting Flashcards

A company grants 50,000 stock options with a Black-Scholes value of $6.00. The grant specifies a requisite service period of 3 years. If 10% of employees are expected to forfeit annually, what is the total estimated compensation expense at grant date using the estimated forfeiture method?

Answer: $218,700

Expected to vest = 50,000 × (0.90)^3 = 36,450 shares; total expense = 36,450 × $6.00 = $218,700.

Under ASC 718, if a share-based award is classified as a liability (e.g., due to a cash settlement feature), the liability is remeasured at:

Answer: Each reporting date at current fair value until settlement

Liability-classified awards are remeasured to fair value at each reporting date, with changes flowing through compensation expense, until the award is settled.

When building a forecast model for a company's annual share-based compensation expense, which factor would cause the forecasted expense to INCREASE even if no new grants are made?

Answer: A lower estimated forfeiture rate applied retroactively to existing grants

Lowering the estimated forfeiture rate increases the number of awards expected to vest, triggering a catch-up adjustment that raises current-period compensation expense.

The 'expected term' input for Black-Scholes reflects anticipated employee behavior. Which scenario would most likely LENGTHEN the expected term used in a model?

Answer: A large portion of option holders are nearing retirement

Employees nearing retirement tend to hold options longer to maximize gains before departure is required, lengthening the expected term.

In a waterfall model used for a leveraged buyout or liquidation scenario, equity award holders with options priced above the exit value per share would receive:

Answer: Nothing, as out-of-the-money options have no intrinsic value at exit

In a waterfall distribution, out-of-the-money options yield zero proceeds to holders because the per-share exit value is below the exercise price.

A company wants to model 'burn rate' for equity compensation planning. Burn rate is most accurately calculated as:

Answer: Gross shares granted in the year divided by weighted average common shares outstanding

Burn rate measures share dilution pace and equals the number of new shares granted during the year divided by the weighted average basic shares outstanding.

Under FASB ASC 718, which of the following awards is typically excluded from diluted EPS calculations because it is antidilutive?

Answer: Out-of-the-money options with exercise price above the average market price

Out-of-the-money options are antidilutive under the treasury stock method because including them would increase EPS, so they are excluded from the diluted share count.