A Major Conclusion of the FASB's Standard on Accounting for Stock

question 13

Essay

A major conclusion of the FASB's standard on accounting for stock options is that fixed option plans for which the option price is equal to the market price of the stock at the date of grant will result in compensation cost.Under APB Opinion No.25,such plans generated no such compensation cost if the exercise price was greater than or equal to the market price at the grant date.Under the FASB standard,compensation expense would be measured by the value of the option rather than the spread between the option price and the market price of the stock at the grant date.
One means of measuring the value of the option itself is the use of a mathematical model,such as the Black-Scholes option pricing model.This model considers both the minimum value and volatility values in measuring the fair value of an option.The minimum value is the current price of the stock minus both the present value of the exercise price and the present value of expected dividends on the stock during the term of the option,both discounted at the risk-free rate of return.The volatility value is a measure of the amount by which the price of the stock has fluctuated or is expected to fluctuate during a period.Volatility is measured by the standard deviation of a probability distribution.The larger the standard deviation in relation to average price level,the more variable the price.
Identify the objections that might be raised to the use of the Black-Scholes mathematical option pricing model in valuing options issued as part of a stock compensation plan.

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