Magnetic-optical corporation offers a variety of share-based compensation plans to employees. under its restricted stock award plan, the company on january 1, 2013, granted 4 million of its $1 par common shares to various division managers. the shares are subject to forfeiture if employment is terminated within three years. the common shares have a market price of $22.50 per share on the grant date. required:

a)

the total compensation cost pertaining to the restricted shares is $90 million

b)

Total compensation cost is $81 million

Explanation:

Magnetic-Optical Corporation offers a variety of share-based compensation plans to employees. Under its restricted stock award plan, the company on January 1, 2016, granted 4 million of its $1 par common shares to various division managers. The shares are subject to forfeiture if employment is terminated within three years. The common shares have a market price of $22.50 per share on the grant date.

Determine the total compensation cost pertaining to the restricted shares.

Suppose Magnetic-Optical expected a 10% forfeiture rate on the restricted shares prior to vesting. Determine the total compensation cost.

Given that:

common shares market price = $22.50 per share on the grant date

Amount of shares = 4 million = 4000000

Shares price = $1 par common shares

Shares termination years = 3 years

a)

The total compensation cost pertaining to the restricted shares = common shares market price × Amount of shares = 4000000 × 22.5 = 90000000 = $90 million

Therefore, the total compensation cost pertaining to the restricted shares is $90 million

b)

Since the corporation has a forfeiture rate of 10% on restricted shares:

The restricted shares = 10% × $90000000 = 0.1 × 90000000 = 9000000 = $9 million

Total compensation cost = Paid capital - restricted shares = $90 million - $9 million = $81 million

Total compensation cost is $81 million

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