CEP Risk Assessment & Underwriting 2

Question 1

A company is evaluating whether to allow early exercise of employee stock options. Which risk is MOST directly introduced by permitting early exercise?

Accepted Answer

Dilution risk from immediate share issuance

Answer

Early exercise causes immediate share issuance, increasing outstanding shares and diluting existing shareholders sooner than anticipated.

Question 2

Under Black-Scholes option pricing, which input has the GREATEST sensitivity impact on an at-the-money option's value when the option has a long time to expiration?

Accepted Answer

Volatility

Answer

For long-dated at-the-money options, volatility (vega) typically has the greatest sensitivity impact on option value.

Question 3

A company conducting a tender offer for underwater stock options must consider which primary underwriting risk?

Accepted Answer

The risk that employees accept at a higher rate than modeled

Answer

If acceptance rates exceed projections, the company faces higher-than-budgeted cash outflows or share usage to fund the offer.

Question 4

Which of the following BEST describes 'concentration risk' in the context of an employee equity plan?

Accepted Answer

Risk that equity awards are concentrated among too few senior executives

Answer

Concentration risk arises when equity compensation is heavily weighted toward a small group, creating governance and retention exposure if those individuals leave.

Question 5

An ESPP with a lookback provision and 15% discount exposes the company to which type of accounting risk?

Accepted Answer

Risk of understating the compensation expense due to the lookback feature

Answer

The lookback feature is a compensatory element that increases the grant-date fair value and must be fully expensed; failure to capture it understates compensation cost.

(CEP) Certified Equity Professional Practice Test

(CEP) Certified Equity Professional Practice Test

CEP Risk Assessment & Underwriting 2