Question

On January 1, 2016, Telespace Inc. grants 6 million non-qualified stock options to its employees. The stock options have exercise price of $20, which is equal to the grant-date price. All options will vest in three years. The grant date fair value of the options is $15 per option. All 6 million options are expected to vest. On January 1, 2019, all 6 million vested options are exercised when the stock price is $50. The applicable tax rate for all periods is 40%. The company has sufficient taxable income for the stock option tax deductions to reduce income taxes payable in all periods.
How much compensation expense should Telespace recognize for the year of 2016?

Answer 1

Answer:

$30,000,000

Explanation:

compensation expense = total number of stocks granted x grant date value = 6,000,000 x $15 = $90,000,000

this expense will be allocated proportionally during the vesting period = $90,000,000 / 3 years = $30,000,000 per year

compensation expense per year (2016, 2017, 2018) = $30,000,000