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13 December, 21:19

FX Services granted 17.5 million of its $1 par common shares to executives, subject to forfeiture if employment is terminated within two years. The common shares have a market price of $7 per share on the grant date. Ignoring taxes, what is the effect on earnings in the year after the shares are granted to executives?

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  1. 13 December, 21:26
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    The options are given below:

    A. $17.5 million.

    B. $61.25 million.

    C. $122.5 million.

    D. $0 million.

    The correct option is B. $61.25 million.

    Explanation:

    From the question above, we have the following:

    Number of common shares granted = 17.5 million

    Price par common share = $1

    Market price of common shares = $7

    We calculate the effect on earnings in the year after the shares are granted to executives as follows:

    $7 X 17.5 million

    => 122,500,000

    Now, we divide this by the number of years that the common share is subject to forfeiture if employment is terminated:

    => 122,500,000/2

    => $61,250,000
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