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23 January, 17:10

JBL Aircraft manufactures and distributes aircraft parts and supplies. Employees are offered a variety of share-based compensation plans. Under its nonqualified stock option plan, JBL granted options to key officers on January 1, 2021. The options permit holders to acquire 5 million of the company's $1 par common shares for $25 within the next six years, but not before January 1, 2024 (the vesting date). The market price of the shares on the date of grant is $29 per share. The fair value of the 5 million options, estimated by an appropriate option pricing model, is $6 per option. Because the plan does not qualify as an incentive plan, JBL will receive a tax deduction upon exercise of the options equal to the excess of the market price at exercise over the exercise price. The tax rate is 25%.

Determine the total compensation cost pertaining to the incentive stock option plan.

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  1. 23 January, 19:03
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    The total compensation cost pertaining to the incentive stock option plan will be $30,000,000

    Explanation:

    In order to calculate the total compensation cost pertaining to the incentive stock option plan we would have to use the followinf formula:

    Total compensation cost of stock options=Estimated fair market value of the option*Number of options granted

    Total compensation cost of stock options=$6*5,000,000 shares

    Total compensation cost of stock options=$30,000,000

    The total compensation cost pertaining to the incentive stock option plan will be $30,000,000
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