Stock options; forfeiture
Response to the following :
Refer to the situation described in problem 1. Suppose that unexpected turnover during 2017 caused the forfeiture of 5% of the stock options. Ignoring taxes, what is the effect on earnings in 2017? In 2018?
Problem 1:
Stock options
Under its executive stock option plan, National Corporation granted options on January 1, 2016, that permit executives to purchase 12 million of the company's $1 par common shares within the next six years, but not before December 31, 2018 (the vesting date). The exercise price is the market price of the shares on the date of grant, $17 per share. The fair value of the options, estimated by an appropriate option pricing model, is $5 per option. No forfeitures are anticipated. Ignoring taxes, what is the total compensation cost pertaining to the stock options? What is the effect on earnings in the year after the options are granted to executives?