Question

FX Services granted 17.5 million of its $1 par common shares to executives, subject to forfeiture if employment is terminated within two years. The common shares have a market price of $7 per share on the grant date. Ignoring taxes, what is the effect on earnings in the year after the shares are granted to executives?

Answer 1

The options are given below:

A. $17.5 million.

B. $61.25 million.

C. $122.5 million.

D. $0 million.

The correct option is B. $61.25 million.

Step-by-step explanation:

From the question above, we have the following:

Number of common shares granted = 17.5 million

Price par common share = $1

Market price of common shares = $7

We calculate the effect on earnings in the year after the shares are granted to executives as follows:

$7 X 17.5 million

=> 122,500,000

Now, we divide this by the number of years that the common share is subject to forfeiture if employment is terminated:

=> 122,500,000/2

=> $61,250,000