Valuation & Financial Analysis Flashcards

An employee stock purchase plan (ESPP) with a 15% discount, a 24-month offering period, and a lookback provision is classified as compensatory under ASC 718. Its fair value should reflect:

Answer: The discount plus the fair value of the embedded option created by the lookback

The fair value of a compensatory ESPP must include both the purchase price discount and the fair value of the look-back option embedded in the offering.

Which financial metric is most directly used when valuing a stock option grant for purposes of ASC 718 expense recognition?

Answer: Grant-date fair value per option

ASC 718 requires companies to recognize compensation cost equal to the grant-date fair value of the award, allocated over the requisite service period.

If a company grants 100,000 stock options with a grant-date fair value of $8 per option and a 4-year cliff vesting schedule, what is the annual stock-based compensation expense (ignoring forfeitures)?

Answer: $200,000 per year for 4 years

Total compensation of $800,000 (100,000 × $8) is recognized ratably over the 4-year vesting period, resulting in $200,000 per year.

Under ASC 718, how should a company account for estimated forfeitures on equity awards?

Answer: Estimate forfeitures at grant date and adjust expense for those estimates over time

ASC 718 requires companies to estimate forfeitures at grant date and revise estimates as actual forfeitures become known, adjusting cumulative expense accordingly.

What is the 'requisite service period' under ASC 718?

Answer: The period during which an employee must render service to earn the award

The requisite service period is the period over which an employee must provide service to earn the right to the equity award, typically the vesting period.

A company modifies a stock option by reducing the exercise price from $50 to $30 when the stock is trading at $32. Under ASC 718, this modification results in:

Answer: Incremental compensation equal to the increase in fair value from the modification

A modification that increases fair value requires the company to recognize incremental compensation equal to the excess of new fair value over old fair value at the modification date.

In a discounted cash flow (DCF) valuation, what discount rate is most appropriate when valuing equity compensation awards tied to company performance?

Answer: The equity holders' required rate of return (cost of equity)

When valuing equity-linked awards from the equity holders' perspective, the cost of equity is the appropriate discount rate.