Question

JBL Aircraft manufactures and distributes aircraft parts and supplies. Employees are offered a variety of share-based compensation plans. Under its nonqualified stock option plan, JBL granted options to key officers on January 1, 2018. The options permit holders to acquire 5 million of the company's $1 par common shares for $31 within the next six years, but not before January 1, 2021 (the vesting date). The market price of the shares on the date of grant is $35 per share. The fair value of the 5 million options, estimated by an appropriate option pricing model, is $6 per option. Because the plan does not qualify as an incentive plan, JBL will receive a tax deduction upon exercise of the options equal to the excess of the market price at exercise over the exercise price. The tax rate is 40%.

Determine the total compensation cost pertaining to the incentive stock option plan.

Answer 1

Determination of total compensation cost

Total compensation cost pertaining to the incentive stock option plan                                                       = Estimated Fair value of option x Options Granted                                                       = $6 per option x   5 million                                                       = $30 million or $30,000,000

Total compensation cost   =   $30 million or $30,000,000