Question

Eesa Eeyas Co. decides to offer a stock option plan as a performance incentive to 20 key executives. The plan will grant 10,000 stock options to each executive who continues to be employed by the company after four years (cliff vesting). Each option allows the holder to purchase one share of stock for the market price that existed on the grant date ($123.74 per share). Thus, the options will only prove profitable (will only be “in the money”) if the company presumably performs well and the stock price rises. A careful model analysis determines that each stock option has a value of $16.38 on the grant date. As of the grant date, the best estimate is that 90% of the executives will satisfy the vesting condition and then that 85% of the stock options awarded will ultimately be exercised. Determine how much in compensation expense the company should recognize related to the stock options in the first year of the plan. Please explain answer. I do not understand.

Answer 1

Number of Shares under option	200,000	=20*10000*1
( No. of key executive x no. of stock options x no. of share in one stock option )
Option value	$ 16.38
Estimated % of excercising on grant date	90%
No. of Years in which compensation expense to be recorded	4 Years
Compensation expense in the first year of plan	$ 737,100	=200000*16.38*90%*1/4
( No. of share under option x option value x exercise % x 1/4 )