Question

On december 31, 2016, some of corrigan corporation's key executives were granted the option to buy 100,000 shares of the firm's $5 par common stock at an option price of $15 per share. according to the black-scholes model, the total compensation expense associated with the options is $375,000. these options represent compensation for services provided over a four-year period beginning on january 1, 2017, and they become exercisable on that date. as of december 31, 2017, none of the executives had chosen to exercise their options. if corrigan uses the fair value method, how will the executives' stock options affect the firm's net income for 2017?

Answer 1

I believe that if the executives exercised their option to use their fair value method, it would lower the firm's net income for 2017, thereby lowering the overall value of the stock. As a private firm, they do not have to use the fair value method. The compensation expense will also be lower. It would also devalue the projection for the following year.