Practice Test Geeks(CEP) Certified Equity Professional Practice Test
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Valuation & Financial Analysis 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.

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  1. Under ASC 718, which method is most commonly used to estimate the fair value of employee stock options?

    Answer: Black-Scholes-Merton model

    The Black-Scholes-Merton model is the most widely used method for estimating fair value of employee stock options under ASC 718.

  2. Which input to the Black-Scholes-Merton model is considered the most subjective and most challenging to estimate for employee stock options?

    Answer: Expected term

    Expected term is the most subjective input because it must account for employee exercise behavior, which differs from a rational market participant.

  3. A company's stock has a current price of $50. A call option with a $45 exercise price has an intrinsic value of:

    Answer: $5

    Intrinsic value for a call option is the excess of stock price over exercise price: $50 - $45 = $5.

  4. Which of the following best describes 'time value' of an option?

    Answer: The difference between fair value and intrinsic value

    Time value equals total option fair value minus intrinsic value, reflecting the probability that additional value may be gained before expiration.

  5. The 'simplified method' for estimating expected term of stock options, as permitted by SEC SAB 107, calculates expected term as:

    Answer: The average of the vesting period and contractual term

    The simplified method computes expected term as the average of the option's vesting period and full contractual term.

  6. Which of the following would INCREASE the fair value of an employee stock option, all else equal?

    Answer: Increase in expected term

    A longer expected term increases fair value because the option has more time to benefit from favorable stock price movements.

  7. For a company with no history of paying dividends that is considering initiating dividends, what is the most appropriate dividend yield assumption for option valuation?

    Answer: An estimate reflecting the company's expected dividend policy

    ASC 718 requires that the dividend yield assumption reflect the company's best estimate of future dividends over the expected term.