Question

g granted options on January 1, 2021, that permit executives to purchase 23 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, $20 per share. The fair value of the options, estimated by an appropriate option pricing model, is $6 per option. No forfeitures are anticipated. The options are exercised on April 2, 2024, when the market price is $23 per share. By what amount will VF's shareholder's equity be increased when the options are exercised

Answer 1

$460

Step-by-step explanation:

Calculation to determine what amount will VF's shareholder's equity be increased when the options are exercised

First step is to calculate the fair value of award using this formula

Fair value of award=Fair value per option×Options granted

Let plug in the formula

Fair value of award=$138

Based on the above calculation the amount of $138 million total compensation will be expensed equally over the vesting period of 3 years thereby increasing the balance in the PAID-IN CAPITAL-STOCK OPTIONS ACCOUNT

Dr Cash $460

($20 exercise price × 23 million shares)

Dr Paid-in capital - stock options (account balance)138

(6*23)

Cr Common stock 23

(23 million shares at $1 par per share)

Cr Paid-in capital—excess of par (remainder)575

Now let calculate the Increase in shareholder's equity

Increase in shareholder's equity=$575 + $23 - $138

Increase in shareholder's equity= $460

Therefore The amount that VF's shareholder's equity will increased when the options are exercised is $460