Under its executive stock option plan, National Corporation granted 30 million options on January 1, 2021,...

Under its executive stock option plan, National Corporation granted 30 million options on January 1, 2021, that permit executives to purchase 30 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, $27 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)

Expert Solution

Solution:

Compensation Expensesa are recorded at fair value.

Year 2021 - Compensation Expense	$' in Million
Expense at end of Year 2021 (30 Million Options * Fair Value $4 * 1/6)	20.00

Year 2022 - Compensation Expense	$' in Million
Cumulative Expense at end of Year 2022 (30 Million Options * Fair Value $4 * 2/6 * 95% )	38.00
Less: Previously Recorded Expense in 2021	20.00
Year 2022 Compensation Expense	18.00

Year 2023 - Compensation Expense	$' in Million
Cumulative Expense at end of Year 2022 (30 Million Options * Fair Value $4 * 3/6 * 95% )	57.00
Less: Previously Recorded Expenses (20 + 18)	38.00
Year 2023 Compensation Expense	19.00

95% taken from Year 2022 because 5% options are forfeited.

Hence,

Year 2022 Compensation Expense = $18.00 millions

Year 2023 Compensation Expense = $19.00 millions

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ekkarill92 answered 2 years ago

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