XYZ Company Issued 10,000 Options to Its CEO on January

Essay

XYZ Company issued 10,000 options to its CEO on January 1, 2006, at the prevailing market price of $5 per share. The options were expected to vest over a 2-year period. The Black-Scholes value of the option was valued at $2 per share. On December 31, 2007, the CEO exercised all options. Market price on that day was $9 per share. Assume a 35% tax rate.

1. What will be the cumulative effect on the balance sheet as of December 31, 2007 before the exercise of option?
2. What will be the cumulative effect on the balance sheet as of December 31, 2007 after the exercise of option?