10. Under its executive stock option plan, Z Corporation granted options on Janu

Question

10. Under its executive stock option plan, Z Corporation granted options on January 1, 2011, that permit executives to purchase 15 million of the company's $1 par common shares within the next eight years, but not before December 31, 2013(the vesting date). The exercise price is the market price of the shares on the date of grant, $18 per share. The fair value of the options, estimated by an appropriate option pricing model, is $4 per option. No forfeitures are anticipated. The options expired in 2019 without being exercised. By what amount will Z's shareholder's equity be increased?

Explanation / Answer

Fair value per option = $4

Fair value of stock option = $4 * 15 million = $60 million

The $60 million total compensation is expensed equally over the three-year vesting period, increasing the balance in the Paid-in capital-stock options account.

Hence, Z’s shareholder’s equity shall be increased by $60 million

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