Question

Under its executive stock option plan, Q Corporation granted options on January 1, 2021, 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, 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 2023

Answer 1

Answer:

$18 million

Explanation:

Calculation to determine the effect on earnings in 2023

First step is to calculate the Award’s Fair Value

Using this formula

Award’s Fair Value = Purchase Granted Option × Fair Value Per Option

Let plug in the formula

Award’s Fair Value=$15 million × $4

Award’s Fair Value=$60 million

Second step is to calculate the reduction in earning

Using this formula

Reduction in earning = Award’s Fair Value ÷ Vesting years

Let plug in the formula

Reduction in earning= $60 million ÷ 3 years

Reduction in earning= $20 million each year

Now let calculate the Effect on earnings

Effect on earnings= [$60 million*(100%-5%)* 2/3] - $20 million

Effect on earnings= ($60 million*95%*2/3)-$20 million

Effect on earnings=$38 million-$20 million

Effect on earnings=$18 million

Therefore the effect on earnings in 2023 is $18 million