Question

A company granted 30 million of its $1 par common shares to executives, subject to forfeiture if employment is terminated within three years. The common shares have a market price of $8 per share on the grant date. Ignoring taxes, what is the effect on earnings in the year after the shares are granted to executives?

Answer 1

The effect on earnings in the year after the shares are granted to executives is $80 million.  

First step is to calculate the Total compensation cost using this formula

Total Compensation cost = Common Share × Market Price Per Share

Let plug in the formula

Total compensation cost = 30 million × $8

Total compensation cost = $240 million

Second step is to calculate the Effect on Earnings using this formula

Effect on earnings= Total Compensation Cost ÷ Time period

Let plug in the formula

Effect on earnings=$240 million÷3

Effect on earnings= $80 million

Inconclusion the effect on earnings in the year after the shares are granted to executives is $80 million.  

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