Question

Under its executive stock option plan, N Corporation granted options on January 1, 2021, that permit executives to purchase 11.0 million of the company's $1 par common shares within the next eight years, but not before December 31, 2023 (the vesting date). The exercise price is the market price of the shares on the date of grant, $16 per share. The fair value of the options, estimated by an appropriate option pricing model, is $4 per option. No forfeitures are anticipated. Ignoring taxes, what is the effect on earnings in the year after the options are granted to executives? (Round your answer to 1 decimal place.)

Answer 1

N. Corporation

There is no effect on earnings in the year after the options are granted.

Step-by-step explanation:

a) Data and Calculations:

Number of stock options granted to executives = 11.0 million

Par value of common stock = $1

Period before the vesting of interest = 8 years

Grant date = January 1, 2021

Vesting date = December 31, 2023

Exercise price on the date of grant = $16

Fair value of the options = $4 per option

Total compensation expense for the stock option = $44 million ($4 * 11 million)

b) The compensation expense is accrued starting from the vesting date and not before. Therefore, there is no effect on the earnings in the year after the options are granted to the executives.