Which of the following is true regarding stock options?

• A. Stock options represent ownership in a company and entitle the holder to dividends.
• B. Stock options are classified as debt securities on the balance sheet.
• C. Stock options give the holder the right, but not the obligation, to buy or sell shares at a specified price within a certain period.
• D. Stock options require the holder to purchase shares at the market price on the exercise date.

Answer: (C)

Verified step by step guidance

1. Understand the concept of stock options: Stock options are financial instruments that give the holder the right, but not the obligation, to buy or sell shares of a company at a predetermined price (known as the strike price) within a specified time frame.
2. Clarify the ownership aspect: Stock options do not represent ownership in a company until they are exercised. Once exercised, the holder acquires shares, which may entitle them to dividends and voting rights.
3. Examine classification on the balance sheet: Stock options are not classified as debt securities. They are typically recorded as part of equity or as a liability, depending on the nature of the options and accounting standards.
4. Understand the exercise mechanism: Stock options allow the holder to purchase shares at the strike price, which may differ from the market price on the exercise date. The holder is not required to purchase shares at the market price unless specified otherwise.
5. Identify the correct statement: The correct statement is that stock options give the holder the right, but not the obligation, to buy or sell shares at a specified price within a certain period. This flexibility is a key feature of stock options.