Cite the source · Reconstruct the result · Keep assumptions visible
Zephire, Inc., has an employee stock option and RSU grant plan for its senior management team. On January 1, 20X1, the company made a grant of 2 million at-the-money options (maturing in five years) and 1 million shares. The fair value of the options was \(2.85** and the stock price on the date of the grant was **\)23. Both awards vest after 4 years. Calculate the annual expense for the options and the stock grant, and the effect on the balance sheet and cash flow statement.
Given
| Item | Value |
|---|---|
| Options granted | 2m ATM, FV $2.85 each |
| Maturity | 5 years |
| RSU shares | 1m @ $23 |
| Vesting period | 4 years |
The annual expense will flow through SG&A.
For the year ending 20X1
Income Statement
\[ \text{Options expense} = \frac{2\text{m}}{4} \times \$2.85 = \$1.425\text{m} \]
\[ \text{Stock grant expense} = \frac{1\text{m}}{4} \times \$23 = \$5.75\text{m} \]
\[ \text{Total SG\&A increase} = \$1.425\text{m} + \$5.75\text{m} = \boxed{\$7.175\text{m}} \]
Balance Sheet
The expense will be charged to retained earnings.
Cash Flow Statement
No impact — nothing has actually happened yet.
Tax Implications
- For calculating the tax implication, one must first see what the actual stock price or the intrinsic value of the option at the settlement date. If the price on the settlement date is greater than the price on the grant date, this effectively means that you would now record a higher expense, which would result in a tax windfall. this will increase the current expense and hence result in a tax windfall. If, as a company, you need to underpay (Settlement price is lower than Grant price), then you have a tax shortfall.