Your company’s board of directors has heard that offering a stock option plan can be an effective means of hiring and retaining the best employees. They are a bit unfamiliar with how everything works, however, so they call you in to assist. How does a stock option work exactly? If the Board goes forward with an employee stock option plan, will that affect annual net income? If so, how would any expense be calculated when considering factors like forfeitures, expirations, and performance conditions? Fill in the gaps for your clueless board members.
2. The same board members…still struggling to get by…pick up your company’s annual financial statements and notice that two different numbers are reported for earnings per share. There’s a Basic EPS of $2.54 and a Diluted EPS of $1.27. One board member exclaims, “We lost half our earnings in the annual dilution!” Help the board understand what is going on with diluted EPS.
