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 24 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, $28 per share. The fair value of the options, estimated by an appropriate option pricing model, is $5 per option. Suppose that unexpected turnover during 2017 caused the forfeiture of 5% of the stock options.

Compute the amount of compensation expense for 2017 and 2018.

Under its executive stock option plan, National Corporation granted options on January 1, 2016, that permit executives to purchase 24 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, $28 per share. The fair value of the options, estimated by an appropriate option pricing model, is $5 per option. Suppose that unexpected turnover during 2017 caused the forfeiture of 5% of the stock options.

Explanation / Answer

1)Compensation expense :number of shares*option value

= 24*5

= $120 to be amortised over 5 years [1 jan2016-31 dec 2020]

2)Compensation expense for 2016 =120/5= 24 million

due to Anticipated forfeiture ,compensation expense will be : 120(1-.05)= 114 million

Compensation expired till 2017 = revised compesation expense *period expired/total period

= 114*2/5

= $ 45.6 million

compensation expense to be recorded in 2017 = 45.6-24 recognised in 2016 = $ 21.6 million

compensation expense to be recorded in 2018 = Revised compensation /period

             = 114/5 = $ 22.8 million

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