Martin Corp. permits any of its employees to buy shares directly from the company through payroll deduction. There are no brokerage fees and shares can be purchased at a 10% discount. During 2009, employees purchased 8 million shares; during this same period, the shares had an average market price of $15 per share. Martin's 2009 pretax earnings will be reduced by:
A)$ 0
B)$ 12 million
C)$108 million
D)$120 million

Question

Quizplus · Accepted Answer

The pretax earnings reduction is equal to the discount given to the employees when they bought the shares. The discount is 10% of the market price, which is $15 per share. So, the discount is $1.50 per share ($15 x 0.10). The total discount given to employees is therefore $12 million ($1.50 x 8 million shares). This reduction will be subtracted from the pretax earnings of the company.