Under its executive stock option plan, National Corporation granted 12 million options on January 1, 2018, thatpermit executives to purchase 12 million of the company’s $1 par common shares within the next six years, butnot before December 31, 2020 (the vesting date). The exercise price is the market price of the shares on the dateof grant, $17 per share. The fair value of the options, estimated by an appropriate option pricing model, is $5 peroption. No forfeitures are anticipated. Ignoring taxes, what is the total compensation cost pertaining to the stockoptions? What is the effect on earnings in the year after the options are granted to executives?

Question

Under its executive stock option plan, National Corporation granted 12 million options on January 1, 2018, 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, 2020 (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?

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