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If an employee gives up a bonus to purchase a stock option or SAR, what should we use as the correct grant date fair value?

If an employee gives up a bonus to purchase a stock option or SAR, say $15 per option, but the black scholes model is saying the fair value is $14 per option, what should we use as the correct grant date fair value?

Answers

Patricia Boepple
Title: SVP Global Client Operations
Company: Global Shares
(SVP Global Client Operations, Global Shares) |

The option, grant or exercise price never matches the “fair value” of the grant. The option price is usually determined by the Plan’s definition of Fair Market Value and the Plan Administrator’s (Board, Comp Committee or designated individual) approval date of the grant. This is the price an employee has to pay the company to exercise or purchase the shares. The “fair value” of the grant used for accounting (expense) purposes when using the Modified Black-Scholes valuation method for grants to employees requires the following inputs to determine the “fair value”:

1) Option price (also grant or exercise price) of the grant
2) Fair Market Value of the grant as defined by the Plan
3) Expected life of the grant (how long it is expected for the employee to exercise the grant)
4) The volatility rate of the shares to be issued upon exercise of the grant
5) The dividend rate for the shares being issued at exercise
6) The risk free interest rate for the grant which is determined from the date of grant and the expected life of the grant

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