When employees exercise stock options, a company is entitled to a compensation expense deduction equal to the difference between the exercise and
market price.
Although the convertible's
market price usually reverts to its theoretical fair value over time, you'll always have market anomalies like the market conditions of 1994, where none of the market models seemed to work.
Assuming the stock's current
market price is $20, no compensation expense is recognized under Opinion no.
The IRS deemed the contract price to be the
market price at the date the contract was executed.
The ED also states (paragraph 6, page 2) that "the quoted price for a single traded unit in the most active market provides useful information to investors, creditors, and others, and is the basis for determining
market price and reporting market value.
107 says some financial instruments, such as interest rate swaps and foreign-currency contracts, are "customtailored" and may require a market value estimate based on the quoted
market price of a similar financial instrument, adjusted as appropriate for the effects of tailoring.
Market price is determined by buyers and sellers free to bargain and must be substantiated by independent data.
For example, if an employee tenders 625 shares (rather than cash) to exercise an award of 1,000 options, 625 new options are automatically awarded at the then-current
market price in addition to the 1,000 shares already received.
Issue 3: If the employer guarantees a minimum redemption value for the preferred stock, should the number of shares assumed to be outstanding increase if the common stock's
market price falls below the preferred stock's redemption price?
