CEP Financial Modeling & Forecasting 3

Question 1

When modeling the expected term of employee stock options for Black-Scholes purposes, which SEC-approved simplified method is commonly used by companies without sufficient exercise history?

Accepted Answer

Average of vesting period and original contractual term

Answer

The SEC simplified method calculates expected term as the average of the vesting period and the full contractual term of the option.

Question 2

A company uses a binomial lattice model to value stock options. Compared to Black-Scholes, a key advantage is the lattice model's ability to:

Accepted Answer

Incorporate early exercise behavior at each node

Answer

Lattice models evaluate early exercise decisions at each node, making them more accurate for American-style options where early exercise is possible.

Question 3

For a performance share unit (PSU) tied to a non-market condition (e.g., EPS growth), compensation expense should be:

Accepted Answer

Adjusted each period based on the expected number of shares to vest

Answer

For non-market conditions, ASC 718 requires expense to be updated each period based on the probability-weighted estimate of shares expected to vest.

Question 4

Which of the following best describes the 'expected dividend yield' input's effect in the Black-Scholes model?

Accepted Answer

Higher dividend yield decreases option value because dividends reduce the ex-dividend stock price

Answer

Dividends reduce the stock price on ex-dividend dates, lowering the expected future stock price and therefore decreasing call option value.

Question 5

Under the modified retrospective approach allowed by ASU 2016-09 for excess tax benefits, these benefits are now recorded:

Accepted Answer

In income tax expense within the income statement

Answer

ASU 2016-09 requires excess tax benefits and deficiencies from share-based awards to be recognized in income tax expense in the income statement.

(CEP) Certified Equity Professional Practice Test

(CEP) Certified Equity Professional Practice Test

CEP Financial Modeling & Forecasting 3