Chap 19 part 1 Stock based compensation Under its executive stock option plan, N

Question

Chap 19 part 1 Stock based compensation

Under its executive stock option plan, National Corporation granted options on January 1, 2016, that permit executives to purchase 29 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, $33 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 total compensation cost pertaining to the stock options? (Enter your answer in millions (i.e., 10,000,000 should be entered as 10).)

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).)

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).)

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

1. the total compensation cost pertaining to the stock options = 29 millions options * estimated fair value per option

= 29 million * 5 = $145 million spread over 8 years.

2. the effect on earnings in the year after the options are granted to executives =

The earning of the company in the year after the option reduced by = $145 million / 8 years = $18.125 million per year.

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