Exhibit 16-6 On January 1, 2010, 50 executives were given a performance-based stock option plan that would award them with a maximum of 200 shares of $10 par common stock for $20 a share.On the grant date, the fair value of an option was $16.50.The number of options that will vest depends on the size of the annual average increase in sales over the next three years according to the following table:
$\begin{array}{llr}
\text { Anmual Average Increase in Sales }&\text { No. of Shares }\
\text { Greater than $ 5 \% $} &50\
\text {Greater than $ 10 \% $ } &100\
\text {Greater than $ 150 \% $ } &200
\end{array}$
On the grant date, the company estimates the annual average sales increase will be 12%.
-
Refer to Exhibit 16-6.The estimated total compensation cost will be
A)$ 55, 000
B)$ 82, 500
C)$ 27, 500
D)$165, 000

Question

Exhibit 16-6 On January 1, 2010, 50 executives were given a performance-based stock option plan that would award them with a maximum of 200 shares of $10 par common stock for $20 a share.On the grant date, the fair value of an option was $16.50.The number of options that will vest depends on the size of the annual average increase in sales over the next three years according to the following table:
$\begin{array}{llr}
\text { Anmual Average Increase in Sales }&\text { No. of Shares }\
  \text {  Greater than $ 5 \% $} &50\
 \text {Greater than $ 10 \% $  } &100\
 \text {Greater than $ 150 \% $  } &200
\end{array}$
 On the grant date, the company estimates the annual average sales increase will be 12%.
-
Refer to Exhibit 16-6.The estimated total compensation cost will be
A)$ 55, 000
B)$ 82, 500
C)$ 27, 500
D)$165, 000

Quizplus · Accepted Answer

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.

Exhibit 16-6 on January 1, 2010, 50 Executives Were Given