Question

Under its executive stock option plan, N Corporation granted options on January 1, 2018, that permit executives to purchase 16.0 million of the company's $1 par common shares within the next eight 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, $16 per share. The fair value of the options, estimated by an appropriate option pricing model, is $3 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

$16 million each year

Step-by-step explanation:

According to the scenario, computation of the given data are as follow:-

We can calculate the Effect on Earnings in the Year After the Option are Granted by using following formula:-

Award’s Fair Value = Purchase Granted Option × Fair Value Per Option

=$16 million × $3

=$48 million

N Corporation granted executive stock option plan equally over the 3 years (Jan.1,2018 to Dec.31,2020) vesting date, reducing earning is

= Award’s Fair Value ÷ vesting years

= $48 million ÷ 3 years

= $16 million each year