Asked by Alianna Jiminian on Jul 07, 2024
Verified
In 2018, a company employee received an option to purchase the company's stock at $45 per share. If the stock is trading at $40 a share in 2020, the employee will most likely
A) exercise the option, receiving a gain of $5.
B) exercise the option, receiving a gain of $40.
C) not bother to exercise the options.
D) buy the stock at $45 per share.
E) sell the shares to a third party slightly above the market price.
Exercise Price
The specified price at which an option contract can be executed, commonly used in the context of stock option plans.
Stock Market
A public market for buying and selling equity securities and derivatives, reflecting the economic status of companies and the economy.
- Identify the possible advantages and disadvantages of providing stock options as a form of incentive compensation.
Verified Answer
AR
Adonna RichardsonJul 10, 2024
Final Answer :
C
Explanation :
It doesn't make sense for the employee to exercise the option since the stock is currently trading at $40 per share, below the exercise price of $45 per share. It would be more financially beneficial for the employee to not exercise the option and instead wait for the stock price to increase above $45 per share, at which point they could exercise the option and make a profit.
Learning Objectives
- Identify the possible advantages and disadvantages of providing stock options as a form of incentive compensation.
Related questions
Alyssa, the Financial Officer at Doone & Smithfield, Encourages the ...
An Employer Issues Johnny 2,000 Stock Options in Recognition of ...
One Reason That Companies Issue Stock Options Is to Attempt ...
If a Company Distributes Stock to Employees by Granting Stock ...
Which Statement Is True of Using Stock Options as Incentive ...