Question

A Stock option plan gives employees the right to purchase a fixed number of shares of company stock at a specified price for a limited period of time. If the market price of the stock is above the specified option price, employees can purchase the stock and sell it for a profit Example: You have an option to purchase 1,000 shares at $17 share at some later date. In four years the stock price rises to $87/ share, and you decide to exercise your stock option. What is your profit?

Answer 1

To determine the profit from exercising stock options, subtract the total cost of purchasing shares at the option price from the total amount received from selling shares at the market price. In this case, the profit is $70,000.

Step-by-step explanation:

The question asks how to calculate profit from exercising stock options. Suppose you have an option to purchase 1,000 shares at $17 per share (the option price). After four years, the stock price rises to $87 per share (the market price), and you decide to exercise your option.

Here's how to calculate the profit:

• The total cost to purchase the shares at the option price: 1,000 shares * $17/share = $17,000
• The total amount you receive from selling the shares at the market price: 1,000 shares * $87/share = $87,000
• The profit is the difference between what you receive from selling and the cost to purchase: $87,000 - $17,000 = $70,000

Your profit from exercising the stock options is $70,000.