Question

Second Link Services granted restricted stock units (RSUs) representing 11 million of its $1 par common shares to executives, subject to forfeiture if employment is terminated within four years. After the recipients of the RSUs satisfy the vesting requirement, the company will distribute the shares. The common shares had a market price of $22 per share on the grant date. 1. Ignoring taxes, what is the total compensation cost pertaining to the restricted stock units? (Enter your answer in millions (i.e., 10,000,000 should be entered as 10).) 2. Ignoring taxes, what is the effect on earnings in the year after the RSUs are granted to executives? (Enter your answer in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).)

Answer 1

Answer:

1. $242 million

2. $60.5 million decrease in earning

Explanation:

1. Ignoring taxes, what is the total compensation cost pertaining to the restricted stock units? (Enter your answer in millions (i.e., 10,000,000 should be entered as 10).)

Total compensation cost = Number restricted units * Common share market price = 11 million  * $22 = $242 million

2. Ignoring taxes, what is the effect on earnings in the year after the RSUs are granted to executives? (Enter your answer in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).)

Effect on earning = Total compensation cost / Period of forfeiture = $242 / 4 = $60.5 million decrease in earning.