Under its executive stock option plan, National Corporation granted options on J

Question

Under its executive stock option plan, National Corporation granted options on January 1, 2016, that permit executives to purchase 30 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, $31 per share. The fair value of the options, estimated by an appropriate option pricing model, is $4 per option. No forfeitures are anticipated. 1. Ignoring taxes, what is the total compensation cost pertaining to the stock options? (Enter your answer in millions (i.e., 10,000,000 should be entered as 10).) 2. Ignoring taxes, what is the effect on earnings in the year after the options are granted to executives? (Enter your answer in millions (i.e., 10,000,000 should be entered as 10).)

Explanation / Answer

Answer a. Total Compensation Cost = 30 Million shares X $4 (Fair Value per option) = $120 Million Answer b. Effects on Earnings reducing = 120 Million / 5 Years = $24 Millon The $120 million total compensation is expensed equally over the Five-year vesting period, reducing earnings by $24 million each year (from 2016 to 2020)

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