CEP Valuation & Financial Analysis 2

Question 1

Under ASC 718, which method is most commonly used to estimate the fair value of employee stock options?

Accepted Answer

Black-Scholes-Merton model

Answer

The Black-Scholes-Merton model is the most widely used method for estimating fair value of employee stock options under ASC 718.

Question 2

Which input to the Black-Scholes-Merton model is considered the most subjective and most challenging to estimate for employee stock options?

Accepted Answer

Expected term

Answer

Expected term is the most subjective input because it must account for employee exercise behavior, which differs from a rational market participant.

Question 3

A company's stock has a current price of $50. A call option with a $45 exercise price has an intrinsic value of:

Accepted Answer

$5

Answer

Intrinsic value for a call option is the excess of stock price over exercise price: $50 - $45 = $5.

Question 4

Which of the following best describes 'time value' of an option?

Accepted Answer

The difference between fair value and intrinsic value

Answer

Time value equals total option fair value minus intrinsic value, reflecting the probability that additional value may be gained before expiration.

Question 5

The 'simplified method' for estimating expected term of stock options, as permitted by SEC SAB 107, calculates expected term as:

Accepted Answer

The average of the vesting period and contractual term

Answer

The simplified method computes expected term as the average of the option's vesting period and full contractual term.

(CEP) Certified Equity Professional Practice Test