Under its executive stock option plan, B Corporation granted options on January 1, 2021, that permit executives to purchase 24 million of the company's $1 par common shares within the next eight 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, $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 2022 caused the forfeiture of 5% of the stock options. Ignoring taxes, what is the effect on earnings in 2022? (Round your answer to the nearest dollar amount.)

Question

Triston Short

Business

28 September, 21:30

Under its executive stock option plan, B Corporation granted options on January 1, 2021, that permit executives to purchase 24 million of the company's $1 par common shares within the next eight 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, $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 2022 caused the forfeiture of 5% of the stock options. Ignoring taxes, what is the effect on earnings in 2022? (Round your answer to the nearest dollar amount.)

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Answers (1)

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Jack Meza · Answer 1

Total compensation Cost = Number of shares X Fair value per share

= 24 million X $4

= $ 96 million

Year 2021:

Effect on earnings = Total compensation Cost / Termination period

= $ 96 million / 3 years

= $ 32 million

Year 2022:

Effect on earnings = [24 million X $4 X 95% X 2/3] - $32 million

= $ 29 million