Question

Under its executive stock option plan, National Corporation granted 30 million options on January 1, 2018, that permit executives to purchase 30 million of the company’s $1 par common shares within the next six years, but not before December 31, 2020 (the vesting date). The exercise price is the market price of the shares on the date of grant, $19 per share. The fair value of the options, estimated by an appropriate option pricing model, is $3 per option. Suppose that unexpected turnover during 2019 caused the forfeiture of 5% of the stock options. Compute the amount of compensation expense for 2019 and 2020. (Enter your answers in millions rounded to 2 decimal places (i.e., 5,500,000 should be entered as 5.50))

Answer 1

The compensation expense for 2019 is $24 millions

The Compensation Expense for 2020 is $36 millions

Step-by-step explanation:

According to the given data, we have the following:

Fair value of the option=$3

Granted shares - in millions=30

Hence, Fair value of the awarded option=$90 millions

Per year(90/3)=30

previous year deduction=30

95% of fair value of the compensation=81

2/3 of 81=54

Therefore, the compensation expense for 2019= 54-30=$24 millions

The Compensation Expense for 2020=(90/3*3)-30-24=$36 millions