Question 1) Which of the following is true?

1) Which of the following is true?

A) An employee stock option is usually held to maturity

B) An employee stock option tends to be exercised earlier than an OTC option with the same terms

C) An employee stock options tends to be exercised later than an OTC option with the same terms

D) Employee stock options are usually exercised as early as possible

2) Which of the following is NOT usually true about employee stock options?

A) There is a vesting period

B) They can be sold to other employees

C) They are often at-the-money when issued

D) Their value is currently a charge to the income statement

3) What term is used to describe losses shareholders experience because the interests of managers are not aligned with their own?

A) Agency costs

B) Backdating scandals

C) Dilution

D) Income statement expense

4) Which of the following are true of employee stock options?

A) They are commonly valued as though they are regular American options

B) They are commonly valued as though they are regular American options, but with a reduced life

C) They are commonly valued as though they are regular European option

D) They are commonly valued as though they are regular European options but with a reduced life

5) Which of the following was true about employee stock options prior to 1995?

A) The options never had any affect on a company’s financial statements

B) The value of options which were at-the-money when issued had to be expensed on the income statement

C) The value of options which were at-the-money when issued had to be reported in the notes to the financial statements

D) Options which were at-the-money when issued did not affect a company’s financial statements

6) Which of the following was true about employee stock options between 1996 and 2004?

A) The options never had any affect on a company’s financial statements

B) The value of options which were at-the-money when issued had to be expensed on the income statement

C) The value of options which were at-the-money when issued had to be reported in the notes to the financial statements

D) Options which were at-the-money when issued did not affect a company’s financial statements

7) Which of the following was true after 2005?

A) The options never had any affect on a company’s financial statements

B) The value of options which were at-the-money when issued had to be expensed on the income statement

C) The value of options which were at-the-money when issued had to be reported in the notes to the financial statements

D) Options which were at-the-money when issued did not affect a company’s financial statements

8) Which of the following is true about employee stock options after they have been issued?

A) They have to be revalued every year

B) They have to be revalued every quarter

C) They have to be revalued every day like other derivatives

D) They never have to be revalued

9) Which of the following is true about the practice of backdating a stock options grant?

A) It is illegal

B) It is illegal in the majority of states in the U.S., but not all states

C) It is illegal in roughly half the states in the U.S.

D) It is unethical, but not illegal

10) A company surprises the market with an announcement that it has granted stock options to senior executives. The options are exercised four years later. When does dilution take place?

A) Dilution takes place when the options are exercised

B) Dilution takes place on the announcement date

C) Dilution takes place gradually over the four years

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