Question #11
Reading: Reading 9 Employee Compensation - Post-Employment and Share-Based
PDF File: Reading 9 Employee Compensation - Post-Employment and Share-Based.pdf
Page: 4
Status: Incorrect
Correct Answer: A
Your Answer: B
Question
In determining the fair value of employee stock options, which of the following statements is most appropriate?
Answer Choices:
A. A higher than expected dividend yield will decrease the estimated fair value
B. Absent a market-based instrument, U.S. GAAP and IFRS prefer firms to use the Black-Scholes option-pricing model
C. Changes in fair value after the grant date is taken directly to equity
Explanation
Dividends paid out reduce the value of the underlying shares and therefore, reduce the
value of the option.
There is no preference of a specific option-pricing model in either IFRS or U.S. GAAP.
Acceptable models should be consistent with sound economic principles, consistent with
fair value measurement requirements, and reflect all substantive elements of the grant.
Fair value is only estimated on the grant date; subsequent changes in fair value are not
considered.