Under its executive stock option plan, Q Corporation granted options on January 1, 2018, that permit...

Under its executive stock option plan, Q Corporation granted options on January 1, 2018, that permit executives to purchase 15 million of the company's $1 par common shares within the next eight years, but not before December 31, 2020 (the vesting date). The exercise price is the market price of the shares on the date of grant, $18 per share. The fair value of the options, estimated by an appropriate option pricing model, is $4 per option. No forfeitures were anticipated; however, unexpected turnover during 2019 caused the forfeiture of 5% of the stock options. Ignoring taxes, what is the effect on earnings in 2020? Multiple Choice $18.5 million. $18 million. $19 million. $20 million.

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Expert Solution

The fair value of options is to be amortised from the date of grant till vesting period as they render services during the vesting period.

Year 2018:

The fair value of options as on January 1,2018 = $15million x 4 = $60 million

So the expenses to be recognised for 2018 = 60/3 = $20 million.

Year 2019:

During 2019, 5% of stock options forfeited. So the actual fair value of present options = $60 million - 5% = $57 million. Actually this $57 million has to be amortised over three years. So at the end of two years the expense to be recognised is 57/3 x 2 = $38 million. Since $20 million is recognised in 2018 the remaining $18 million is expensed in 2019.

Year 2020:

In 2020, the total of expense to be recognised should be $57 million. Since $38 million is already recognised in two years the remaining $19 million ($57 million - $38 million) is to be expensed.

So the effect on earnings in 2020 is $19 million.

So the answer is Option C

ekkarill92 answered 1 year ago

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