Question

Under its executive stock option plan, National Corporation granted 29 million options on January 1, 2021, that permit executives to purchase 29 million of the company’s $1 par common shares within the next eight years, but not before December 31, 2025 (the vesting date). The exercise price is the market price of the shares on the date of grant, $33 per share. The fair value of the options, estimated by an appropriate option pricing model, is $5 per option. No forfeitures are anticipated.

1. Ignoring taxes, what is the total compensation cost pertaining to the stock options?
2. Ignoring taxes, what is the effect on earnings in the year after the options are granted to executives?

1.	Total compensation cost			million
2.	Effect on earnings	decreased by		million

(For all requirements, enter your answer in millions (i.e., 10,000,000 should be entered as 10).)
  

Answer 1

Values Given in the Question:

Grant Date = 01/01/2021

Fair Value Per Option = $5/option

Vesting Period = 8 years

Options = 29 million

Vesting date = 31/12/2025

Par Value of per Common share = $1

Market price of the shares on the date of grant= $33

Calculation of total compensation cost = Options * Fair value per option at the grant date

= 29 * 5

= $145 million

The $145 million total compensation is expensed equally over the 5yearperiod vesting period, reducing earnings by 29 million each year.

The earnings will reduced by $29 million in the year after the options are granted to executives.