CEP Financial Modeling & Forecasting 2

Question 1

A company grants 10,000 stock options with a Black-Scholes fair value of $8.50 each. Using straight-line attribution over a 4-year vesting schedule, what is the annual compensation expense recognized?

Accepted Answer

$21,250

Answer

Annual expense = (10,000 × $8.50) / 4 = $85,000 / 4 = $21,250 per year under straight-line attribution.

Question 2

Which input to the Black-Scholes model represents the annualized standard deviation of the continuously compounded returns on the underlying stock?

Accepted Answer

Expected volatility

Answer

Expected volatility is the annualized standard deviation of continuously compounded stock returns and is a key Black-Scholes input.

Question 3

Under ASC 718, when an employee forfeits unvested options before the service condition is met, the company should:

Accepted Answer

Reverse previously recognized compensation expense for the forfeited awards

Answer

ASC 718 requires that previously recognized compensation expense be reversed when awards are forfeited before vesting.

Question 4

A Monte Carlo simulation is preferred over a lattice model for valuing stock options when:

Accepted Answer

The option has a market condition such as a TSR hurdle

Answer

Monte Carlo simulation is best suited for awards with market conditions like TSR hurdles because it can model thousands of price paths simultaneously.

Question 5

In a diluted EPS calculation under the treasury stock method, which of the following correctly describes the denominator adjustment for in-the-money options?

Accepted Answer

Add net new shares: options exercisable minus shares repurchased at average market price

Answer

The treasury stock method adds the net incremental shares: proceeds from assumed exercise divided by average market price are subtracted from the option shares.

(CEP) Certified Equity Professional Practice Test

(CEP) Certified Equity Professional Practice Test

CEP Financial Modeling & Forecasting 2