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Under its executive stock option plan, National Corporation granted 18 million options on January 1, 2021,...

Under its executive stock option plan, National Corporation granted 18 million options on January 1, 2021, that permit executives to purchase 18 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, $15 per share. The fair value of the options, estimated by an appropriate option pricing model, is $2 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.

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Answer #1

Calculation:

Step 1: For calculating compensation expense first we find Per year fair value of total compensation:

Fair value of Options = 18 million shares*$2per option

= $36 million

Per year fair value of total compensation = $36 million / 3

= $12 million

Step 2: Calculate-

Fair value of total compensation after deducting 5% of Forfeiture = $34.2 million (100% - 5% = 95% on $36 million)

Fair value of total compensation relating to coming years = $34.2 million * 2 / 3

= $22.8

Previous year deduction (2021) = $12 million

Compensation expense for 2022 is $10.8 million ($22.8 million - $12 million)

Compensation expense for 2023 is $11.4 million ($34.2 million * 3 / 3) - $12 million - $10.8 million)

Therefore, the compensation expense for:

2022 is $10.8 million

2023 is $11.4 million

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