On January 1, 2017, RED Inc. issued stock options for 200,000 shares to a division manager. The options have an estimated fair value of $6 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by i achieved, butin 20) 1S. afte oxne year 6% in three years, Blue initially estimates that it is not probable the goal but in 2018, after one year, Blue estimates that it is probable that divisional revenue will increase by 6% by the end of 2019 earnings in 2018? Ignoring taxes, what is the effect on A. $200,000 B. $400,000 C. $600,000 D. $800,000

Question

Jazlene Hopkins

Business

16 July, 13:18

On January 1, 2017, RED Inc. issued stock options for 200,000 shares to a division manager. The options have an estimated fair value of $6 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by i achieved, butin 20) 1S. afte oxne year 6% in three years, Blue initially estimates that it is not probable the goal but in 2018, after one year, Blue estimates that it is probable that divisional revenue will increase by 6% by the end of 2019 earnings in 2018? Ignoring taxes, what is the effect on A. $200,000 B. $400,000 C. $600,000 D. $800,000

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Answers (1)

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Nicholas Becker · Answer 1

B. $400,000

Explanation:

For computing the effect, we have to compute the total compensation expense which is shown below:

Total compensation expense = Number of stock options issued * estimated fair value

= 200,000 shares * $6

= $1,200,000

This compensation is for 3 years, but we have to compute for a one year

So, it would be

= Total compensation expense : number of years

= $1,200,000 : 3 years

= $400,000