Under its executive stock option plan, M 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 2019?

A. $18.5 million.

B. $19 million.

C. $20 million.

D. $18 million

Question

Business

Humberto Johns

30 May, 00:08

Under its executive stock option plan, M 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 2019?

A. $18.5 million.

B. $19 million.

C. $20 million.

D. $18 million

+1

Answers (1)

Know the Answer?

Phoebe Conley · Answer 1

D. $18 million.

Explanation:

The $60 million total compensation is expensed equally over the three-year vesting period, reducing earnings by $20 million in 2013. The company should adjust the cumulative amount of compensation expense recorded to date in the year the estimate changes.

(60.952/30) - 20