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ACCA Strategic Professional · Advanced Financial Management · The role and responsibility of senior financial executive/advisor

Zeta plc has 10 million shares at $5.00 each. Managers hold 1 million options, each with a $4.00 exercise price, issued as part of a remuneration scheme. Ignoring any other effects, what is the immediate intrinsic value of the options to managers if all are exercisable now?

The intrinsic value is $1.0 million. Each option lets the holder buy a $5.00 share for $4.00, so it is worth $1.00 now, and with 1 million options the total is $1.0 million. Using the exercise cost or the full share value would be wrong.

  1. A$1.0 millionCorrect
  2. B$4.0 million
  3. C$5.0 million
  4. D$10.0 million

Explanation

Intrinsic value per option is $5.00 - $4.00 = $1.00. Multiplying by 1 million options gives $1.0 million. The $4.0 million is the total exercise cost, and $5.0 million is the market value of the underlying shares, ignoring the exercise price.

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