h. 19 Homework Ques 2. 1000 points Under its executive stock option plan, Nation

Question

h. 19 Homework Ques 2. 1000 points Under its executive stock option plan, National Corporation granted options on January 1, 2016, that permit executives to purchase 15 million of the company's $1 par common shares within the next six years, but not before December 31, 2018 (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 $4 per option. No forfeitures are anticipated. 1 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 otal mellion (Enter your answer in millions (i.e., 10,000.000 should be entered as 10).) on million Reterences eBook & Resources Worksheet Difficulty d Fasy Check my.work

Explanation / Answer

Solution:

Part 1 –

Total compensation cost = Number of Share Option x Fair Value per option

= 15 million x $4

= $60 million

Total Compensation Cost = $60 million

Part 2 –

The $60 million total compensation is expensed equally over the 3 years vesting period, reducing earnings by $20 million (60/3) each year.

Hence,

Effect on earnings reducing earnings by $20 million

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