Question

EG Corporation granted restricted stock units (RSUS) representing 32.3 million of its $1 par common shares to executives, subject to forfeiture if employment is terminated within three years. After the recipients of the RSUS satisfy the vesting requirement, the company will distribute the shares. The common shares had a market price of $6.6 per share on the grant date. Required:

1. Ignoring taxes, determine the total compensation cost pertaining to the restricted stock units. (Enter your answer in millions rounded to 2 decimal places (i.e., 5,500,000 should be entered as 5.50).)
2. What is the effect on earnings in the year after the shares are granted to executives? (Enter your answer in millions rounded to 2 decimal places (i.e., 5,500,000 should be entered as 5.50).)

Answer 1

The total compensation cost pertaining to the restricted stock units is $212.58 million. The effect on earnings in the year after the shares are granted to executives depends on how the RSUs are settled, either in cash or stock.

Step-by-step explanation:

To determine the total compensation cost pertaining to the restricted stock units (RSUs), we need to calculate the fair value of the RSUs on the grant date. The fair value per share is the market price of the common shares on the grant date, which is $6.6.

Since EG Corporation granted RSUs representing 32.3 million common shares, the total fair value of the RSUs is 32.3 million multiplied by $6.6, which is $212.58 million. Therefore, the total compensation cost pertaining to the RSUs is $212.58 million.

The effect on earnings in the year after the shares are granted to executives depends on whether the RSUs are settled in cash or stock. If the RSUs are settled in cash, there will be a decrease in cash and an increase in compensation expense, resulting in a decrease in earnings.

If the RSUs are settled in stock, there will be no cash flow but there will still be an increase in compensation expense, resulting in a decrease in earnings. The amount of the decrease in earnings would be equal to the total compensation cost of $212.58 million.