Under its executive stock option plan, N Corporation granted options on January

Question

Under its executive stock option plan, N Corporation granted options on January 1, 2013, that permit executives to purchase 12.0 million of the company's $1 par common shares within the next eight years, but not before December 31, 2015 (the vesting date). The exercise price is the market price of the shares on the date of grant, $17 per share. The fair value of the options, estimated by an appropriate option pricing model, is $2 per option. No forfeitures are anticipated. Ignoring taxes, what is the effect on earnings in the year after the options are granted to executives?

A) $ 0 million.

B) $8.0 million.

C) $24.0 million.

D) $36.0 million.

Explanation / Answer

The amount to be recongnised as employee compensation can be computed as follows:
[(No: of options expected to be exercised * Fair value)/ Vesting Period]- Option expense already recognised
= [ ($12million * 2)/ 3]- 0
= $8 million

As it is the option expense to be recognised in the Profit and Loss account, the effect on earnings shall be upto $8 million

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