Questions about book volume II P151: What does underwanter options mean? How to reprice it? Can somebody help me figure it out? The stock-based compensations accounting seems very hard to me. Jessie
Underwater option means call option granted to management that is now way out-of-the-money Repricing means changing the stike price of the options. So, at the time of repricing, you price the option with Black-Scholes with the old strike price, and then with the new one. The change in value of the option is to be recorded on the income statement.
That’s btw a great way to reward poor management. Stock price is $9, the board grants the CEO with option with strike price at $10 … a few months later, the stock price is $1, so the board feel sthat they have to reprice the option in order to keep the CEO motivated, the strike price becomes $2. … The stock price goes to $5, so the CEO gets $3 per option and retire in the new mansion he can now aford. In the midtime, the shareholders (who bought the shares when the options were originally granted) have lost $4 per share
Was this article really the best choice out there for stock option accounting? And why am I also finding it difficult? It just seems like the authors crammed a lot of information into a few short paragraphs. Oh look a ridiculous appendix comparing all three standards, so have fun memorizing!