Crash Course in Accounting and Financial Statement Analysis, Second Edition

Stock Options

As discussed in Chapter 5, stock options are the legal right to buy or sell shares of stock at a specific price and at a specific time. Many companies grant them to their employees, including top management, as compensation instead of cash.

Stock options have the following characteristics:

• Exercise price: Indicates the price at which employees can buy company stock. Employees make a profit by purchasing company shares below their market price (i.e., exercise price of granted options < market price of company shares).

• Expiration date: A time period, usually in years, after the grant of options and before their expiration, when an employee can exercise them, that is, purchase company stock.

• Vesting schedule: Indicates a time period (in years) over which stock options can be exercised.

Companies disclose the amount of outstanding and exercisable stock options granted to employees in the footnotes of their 10-K or Annual Report (Exhibit A.1).

Exhibit A.1. Disclosure of Outstanding and Exercisable Stock Options Takes Place Once a Year, in the Footnotes of Companies’ 10-K or Annual Report

Options	Shares	Weighted-Average Exercise Price	Weighted-Average Remaining Life in Years	Aggregate Intrinsic Value
Outstanding at January 31, 2005	68,115,000	$46.79
Granted	4,281,000	50.74
Exercised	(4,208,000)	23.26
Forfeited or expired	(8,645,000)	51.92
Outstanding at January 31, 2006	59,543,000	$ 48.02	6.5	$ 163,326,000
Exercisable at January 31, 2006	32,904,000	$ 45.20	5.3	$ 162,240,000
The weighted-average ...