What Happens to an Option If the Underlying Stock Has

question 19

Multiple Choice

What happens to an option if the underlying stock has a 2-for-1 split?

• A) There is no change in either the exercise price or in the number of options held.
• B) The exercise price will adjust through normal market movements; the number of options will remain the same.
• C) The exercise price would become one-half of what it was, and the number of options held would double.
• D) The exercise price would double, and the number of options held would double.
• E) There is no standard rule-each corporation has its own policy.

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Definitions:

Acquisition Differential

The difference between the cost of an acquisition and the fair value of the net identifiable assets acquired.

Ownership Interest

Refers to the percentage or portion of a company that is owned by a shareholder, indicating a claim on assets and possibly a right to the income of the company.

Equity Method

An accounting technique used to record investments in which the investor has significant influence over the investee but does not control it outright.

Voting Shares

Shares that give the shareholder the right to vote on company matters, such as electing directors and approving company policies.