Valuation & Financial Analysis Flashcards
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Read the first 7 Valuation & Financial Analysis flashcards as text
Which of the following describes the 'delta' of an option in the context of equity compensation plan administration?
Answer: The change in option value for a $1 change in the underlying stock price
Delta measures how much the option's price changes for each $1 move in the underlying stock price, and ranges from 0 to 1 for call options.
For financial reporting under ASC 718, which type of award requires mark-to-market (liability) accounting?
Answer: Cash-settled stock appreciation rights (SARs)
Cash-settled awards like cash SARs are classified as liabilities under ASC 718 and remeasured at fair value each reporting period until settlement.
Under a relative TSR performance plan, an employee receives shares only if the company's total shareholder return ranks above the 50th percentile of a peer group. This is an example of a:
Answer: Market condition
A performance metric based on relative stock price performance (TSR vs. peers) is a market condition under ASC 718.
What effect does a stock split have on previously granted unvested stock options?
Answer: The number of options and exercise price are adjusted proportionally to maintain economic equivalence
To maintain economic equivalence, the number of options is multiplied and the exercise price is divided by the split ratio (e.g., a 2-for-1 split doubles shares and halves the strike price).
Which of the following would cause a company to recognize a tax benefit (windfall) related to stock-based compensation?
Answer: An employee exercises NSOs when the stock price is above the exercise price
When an employee exercises NSOs, the company receives a tax deduction equal to the spread, which may exceed the cumulative book expense recognized, creating a windfall tax benefit.
When computing diluted earnings per share (EPS) under ASC 260, which method is used to incorporate the dilutive effect of outstanding stock options?
Answer: Treasury stock method
The treasury stock method assumes the proceeds from option exercise are used to repurchase shares at the average market price, with the net incremental shares added to diluted EPS denominator.
A company grants stock options to employees in Country A, where the options are subject to a 409A-like deferred compensation tax if not structured properly. What valuation standard typically applies to determine a compliant exercise price?
Answer: Fair market value determined by a qualified independent appraisal or formula
IRC Section 409A requires that stock options be granted at no less than fair market value on the grant date, typically established by a qualified independent appraisal (409A valuation) for private companies.