Question

Under its executive stock option plan, National Corporation granted 30 million options on January 1, 2018, 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, 2020 (the vesting date). The exercise price is the market price of the shares on the date of grant, $25 per share. The fair value of the options, estimated by an appropriate option pricing model, is $3 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?

Answer 1

1. Calculation of Compensation cost

Total compensation cost = Total no of stock options expected to be vested x Fair value

= 30,000,000 x 3 = 90,000,000

2 . Effect on earning in the year after the option are granted

There will be no impact on total earnings attributable to stock option plan in the year after the option's are granted, However the EPS (earning per share) will be affected as the no. of share holders will increase.