Stock Options
Response to the following problem:
On January 1, 2009, Tiger Man Company established a stock option plan for its senior employees. A total of 400,000 options were granted that permit employees to purchase 400,000 shares of stock at $20 per share. Each option had a fair value of $5 on the grant date. The market price for Tiger Man stock on January 1, 2009, was $20. The employees are required to remain with Tiger Man for three years (2009, 2010, and 2011) in order to be able to exercise these options. Tiger Man's net income for 2009, before including any consideration of compensation expense, is $675,000.
Required:
1. Compute the compensation expense associated with these options for 2009 under the fair value method. Note that the period of time that the employees must work to be able to exercise the options is three years.
2. Interpretive Question: You are a Tiger Man stockholder. What objections might you have to Tiger Man's employee stock option plan?