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, $19 per share. The fair value of the options, estimated by an appropriate option pricing model, is $5 per option. No forfeitures are anticipated. Ignoring taxes, what is the effect on earnings in the year after the options are granted to executives?

Answer 1

$13,199,199.99

Step-by-step explanation:

Number of options = 11 million

Fair value per option = $4

Total Compensation = 11,000, 000 × $4 = $44,000,000

Vesting period = December 31, 2023 - January 1, 2021 = 3 years

Compensation expense per year during Vesting period :

$44,000,000 ÷ 3 = $1,466,667

Adjusted cumulative amount of compensation expense recorded after option was granted to executive :

2022:

($44,000,000 × (2/3) × 95%) - $14,666,666.67

$27,866,666.67 - $14,666,666.67

= $13,199,199.99