coptions - STOCK OPTIONS A stock option is a way to pay and...

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STOCK OPTIONS A stock option is a way to pay and motivate employees by giving them an equity interest such as stock that increases in value based on the future performance of the company. According to SFAS 123 (revised 2004), the method of recognizing the cost of compensation under a stock option plan is the fair value method . Under the previous intrinsic value method, compensation was measured by the excess of the market price of the stock over the exercise price at the date of grant. When the market price equals or is lower than the exercise price (which was almost always the case), there was no compensation cost. The FASB required a company using APB5 to disclose in the notes the pro forma net income and earnings per share amounts as if it had used the fair value method. Using the fair value method, compensation cost is computed based on the fair value of the options on the date of grant. Fair value is estimated using an option pricing model (e.g., Black-Scholes). No adjustments are made after the grant date in response to
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This note was uploaded on 02/05/2012 for the course MATH 112 taught by Professor Taylor during the Spring '06 term at Texas A&M University, Corpus Christi.

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