Maxon Inc. developed a business strategy that uses stock options as a major comp
ID: 2477834 • Letter: M
Question
Maxon Inc. developed a business strategy that uses stock options as a major compensation incentive for its top executives. On January 1, 2013, 30 million options were granted, each giving the executive owning them the right to acquire five $1 par common shares. The exercise price is the market price on the grant date—$10 per share. Options vest on January 1, 2017. They cannot be exercised before that date and will expire on December 31, 2019. The fair value of the 30 million options, estimated by an appropriate option pricing model, is $41 per option. Ignore income tax.
$0.
$1,230 million.
$615 million.
$308 million.
Maxon Inc. developed a business strategy that uses stock options as a major compensation incentive for its top executives. On January 1, 2013, 30 million options were granted, each giving the executive owning them the right to acquire five $1 par common shares. The exercise price is the market price on the grant date—$10 per share. Options vest on January 1, 2017. They cannot be exercised before that date and will expire on December 31, 2019. The fair value of the 30 million options, estimated by an appropriate option pricing model, is $41 per option. Ignore income tax.
Explanation / Answer
Answer
On January 1, 2013, 30 million options were granted, each giving the executive owning them the right to acquire five $1 par common shares.
Options vest on January 1, 2017. They cannot be exercised before that date and will expire on December 31, 2019.
So vesting period is 4 years (January 1, 2013 to January 1, 2017)
The fair value of the 30 million options, estimated by an appropriate option pricing model, is $41 per option.
Total Fair value of options = Total options * Fair value per option
= 30 million * $ 41 per option
= 1230 million
Maxon's compensation expense in 2013 = Total fair value of options / No of vesting years
= $ 1230 million / 4 years
= 307.5 million
Answer : Maxon's compensation expense in 2013 for these stock options was $308 million.