Asked by Hailey Horner on Jul 07, 2024
Verified
Refer to Exhibit 16-6.The estimated total compensation cost will be
A) $ 55, 000
B) $ 82, 500
C) $ 27, 500
D) $165, 000
Performance-Based Stock Option Plan
A program that grants employees options to purchase a company's stock at a set price, contingent on meeting specific performance benchmarks.
Annual Average Increase
The average yearly growth rate of a variable, such as sales or revenue, often used to measure and project performance trends.
Compensation Cost
The total amount of expense that a company recognizes for paying its employees, including wages, salaries, bonuses, and benefits.
- Ascertain the expense linked to stock appreciation rights (SARs) and stock options in compensation calculations.
Verified Answer
NG
Nanci GonsalesJul 13, 2024
Final Answer :
B
Explanation :
To calculate the estimated total compensation cost, we need to first calculate the number of options that will vest based on the estimated annual average sales increase of 12%.
The table shows that a 12% increase in sales will result in 75% of the options vesting. Since each of the 50 executives was granted a maximum of 200 shares, the total number of shares that could vest is 50 x 200 = 10,000.
If 75% of the options vest, then the total number of shares that will vest is 10,000 x 0.75 = 7,500.
The fair value of an option on the grant date was $16.50, so the total compensation cost would be 7,500 x $16.50 = $123,750.
However, this is an estimate based on the assumption of a 12% annual average sales increase. If the actual increase is different, the number of options that vest and the total compensation cost could be higher or lower. Therefore, B is the best choice for the estimated total compensation cost.
The table shows that a 12% increase in sales will result in 75% of the options vesting. Since each of the 50 executives was granted a maximum of 200 shares, the total number of shares that could vest is 50 x 200 = 10,000.
If 75% of the options vest, then the total number of shares that will vest is 10,000 x 0.75 = 7,500.
The fair value of an option on the grant date was $16.50, so the total compensation cost would be 7,500 x $16.50 = $123,750.
However, this is an estimate based on the assumption of a 12% annual average sales increase. If the actual increase is different, the number of options that vest and the total compensation cost could be higher or lower. Therefore, B is the best choice for the estimated total compensation cost.
Learning Objectives
- Ascertain the expense linked to stock appreciation rights (SARs) and stock options in compensation calculations.