Question

Under its executive stock option plan, National Corporation granted 12 million options on January 1, 2021, that permit executives to purchase 12 million of the company’s $1 par common shares within the next six years, but not before December 31, 2023 (the vesting date). The exercise price is the market price of the shares on the date of grant, $16 per share. The fair value of the options, estimated by an appropriate option pricing model, is $4 per option. Suppose that unexpected turnover during 2022 caused the forfeiture of 5% of the stock options.

Compute the amount of compensation expense for 2022 and 2023.Under its executive stock option plan, National Corporation granted 12 million options on January 1, 2021, that permit executives to purchase 12 million of the company’s $1 par common shares within the next six years, but not before December 31, 2023 (the vesting date). The exercise price is the market price of the shares on the date of grant, $16 per share. The fair value of the options, estimated by an appropriate option pricing model, is $4 per option. Suppose that unexpected turnover during 2022 caused the forfeiture of 5% of the stock options.

Compute the amount of compensation expense for 2022 and 2023. (Enter your answers in millions rounded to 2 decimal places (i.e., 5,500,000 should be entered as 5.50))
  

Answer 1

Vesting period = 1st Jan 2021 to 31 th Dec 2023	3	years
Exercise period = 6 years - 3 years =	3	years
Number of Options =	12	million
Exercise price=	$16
Fair Value of Stock Option =	$4
Intrinsic value = 0 , (Since, Exercise price = Market value of share)
Compensation Cost= Number of options x  Fair value of stock option ($16 Million x $4)	$48	Million
Annual compensation expense = Total Compensation cost / vesting period = $48 million/3	$16	million
compensation expense Year 2022	$16	million
compensation expense Year 2023	$16	million