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).
| 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 ... | ||||
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