Question

Under its executive stock option plan, N Corporation granted options on January 1, 2021, that permit executives to purchase 17.0 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, $15 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

$17 million

Step-by-step explanation:

The effect on earnings in the year after considering the options granted to executives is shown below:

= (Number of granted options permitted for purchased × fair value of the options) ÷ number of years

= (17 million options × $3) ÷ 3 years

= $17 million

We simply applied the above formula so that the effect would be come and at each year $17 million is reduced