Question

Wilson Inc. developed a business strategy that uses stock options as a major compensation incentive for its top executives. On January 1, 2021, 20 million options were granted, each giving the executive owning them the right to acquire five $1 par common shares. The exercise price is the market price on the grant date—$10 per share. Options vest on January 1, 2025. They cannot be exercised before that date and will expire on December 31, 2027. The fair value of the 20 million options, estimated by an appropriate option pricing model, is $40 per option. Ignore income tax. Wilson's compensation expense in 2021 for these stock options was: Multiple Choice a.$0. b.$200 million. c.$400 million. d.$800 million.

Answer 1

Answer:

c. $800 million

Explanation:

Data provided as per the requirement of compensation expenses is shown below:-

Fair Value = $20 million

Pricing model per option = $40

The computation of compensation expense is shown below:-

Compensation expense = Fair Value × Pricing model per option

= $20 million × $40 per option

= $800 million

Therefore for computing the compensation expenses we simply multiplied the fair value with pricing model per option.