2011 mock q#32

Select passage

The second proposad change pertains to the assumptions used in the application of the option pricing model used to value that stock options. These assumptions are reviewed every three years, based on e onomic fa toes and share price history. The company currently used theBlack-scholes model to determin the fair value of the granted stock options and chi it 1 contains current and proposed assumptions

rfr Currently 5% Proposed 4.5%

Volatility currently 20% proposed 18%

exp life no change

div yield curr-4%. Prop-3.5%

In the second proposal change for the incentive plan, which individual change in the assumptions summarized in exhibit above will most likely result in increase in compensation expanse?


b risk free rate

c dividend yield

This is so confusing I marked rfr. Can you please discuss this so we can understand the differences?


Lower yield means higher value of stock which means higher value of stock option which mean higher compensation expense.