Thor Corp. provided a grant of options to its top executives. On January 1/1/17,

Question

Thor Corp. provided a grant of options to its top executives. On January 1/1/17, the company granted 10,000 options to purchase its $1 par value common stock for $30 a share when the company’s stock was actively trading at $25 a share.

The shares vest in three groups over time, the first 20% within three years, the second 20% in four years and the final 60% in five years from 1/1/17. The company estimates the fair value of these options at $42 through option pricing models. The options expire 5 years after their vesting date.

A. Determine compensation expense for 2019 and 2020 using an accelerated allocation.

B. Suppose that all the options which had vested by 1/1/20 were exercised when the stock was trading at $51 a share. Provide any tax effects assuming Thor Corp. faces a 40% marginal tax rate.

Explanation / Answer

compensation expense for 2019 = (10000*20%*42)/3 28000 compensation expense for 2020 = (10000*20%*42)/4 21000 tax expense deductible when options are exercised =(51-30)*2000 42000 tax liability is reduced by =42000 * 40% 16800

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