Red Company is a calendar-year firm with operations in several countries. At Jan

Question

Red Company is a calendar-year firm with operations in several countries. At January 1,2011, the company had issued 40,000 executive stock options permitting executives to buy40,000 shares of stock for $25. The vesting schedule is 20% the first year, 30% the second year,and 50% the third year (graded-vesting). The fair value of the options is estimated as follows:

Vesting Date                      Amount Vesting                                               Fair Value per option

Dec 31 2011                                        20%                                                        $7

Dec 31 2012                                        30%                                                        $8

Dec 31 2013                                        50% $12

What is the compensation expense related to the options to be recorded in 2012?

Explanation / Answer

Number of share vest in 2011 = 40000 *20% = 8000 shares

Compensation expense for 2011 = 8000 * 7 = $56000

for 2012:

Number of shares vest in 2012=   40000 * .30 = 12000 shares

compensation expense for 2012 ={ [12000+ 8000 ] * 8 ] - 56000 recognised in 2011

                                                            =    [20000 *8 ] - 56000

                                                          = 160000 -56000

                                                           = $ 104000 to be recognised in 2012

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