Ch15 Share Based Payments

Question 1

Three types of share-based compensation plans

Answer 1

1. employee stock options (ESOs)
2. restricted / performance share units (RSUs and PSUs)
3. share appreciation rights (SARs)

Question 2

ESOs - stock options

Answer 2

1. grant date - date when employee receives the option
2. grant date price - current market price on the date of the grant
3. expiry date - date when option expires (no longer be exercised / can be as long as 10 yrs)
4. exercise price / strike price - price emplyee pays when exercised
5. exercise date - date when option is exercised
6. vesting date - date on which the option may first be exercised
7. can be setteled by
   - share
   - cash

Question 3

RSUs and PSUs

Answer 3

1. vesting condition：yrs of service / performance goals
2. value of the shares dependent on market value when issued
3. forfeited when condition not met
4. share (equity) or cash (liability) settlement

Question 4

SARs

Answer 4

1. benchmark price: price used for calculation of grant
2. equity / cash settlement
3. (market price - bench mark $) / marke price = # of shares issued

Question 5

Intrinsic value of an option

Answer 5

1. market price - exercise price
   - in-the-money: MP > EP
   - out-of-the-money: MP < EP
2. fair value of the option $16
   market price of share $17
   exercise price $5

• $17 - $5 = $12 - intrinsic value of option
• $16 - $12 = $4 - future expectations of the option value

Question 6

intrinsic value of an RSU

Answer 6

Current share price

Question 7

intrinsic value of SARs

Answer 7

current share price - benchmark price