Derivatives

Question 1

Compensation expense in stock option

Answer 1

It is valued by taking the FV Of the option then record the expense ratably over the vesting period..

Comp exp = FV/3 YEARS

Question 2

During year 1, Evan Inc. purchased 100 shares of Silva Corp’s stock for $10 per share. By the end of year 1, Silva’s stock price was $14 per share. On January 1 of year 2, Silva announced a 2-for-1 stock split. By the end of year 2, Silva’s stock price was $20. Silva also paid a dividend of $2 per share at the end of year 2. What amount will Evan report as income at the end of year 2 related to its Silva stock investment?

Answer 2

First, the $4 stock price increase ($400 income) in year 1 will have already been recognized in income by Evan in year 1. So the starting point for the calculation of income is $14 per share for year 2.

With the stock split, Evan now has 200 shares. The stock increased from $14 per share to $20 per share, so Evan has $6 x 200 = $1,200 income from the stock price alone. Then the dividend is another $400 in income: $2 dividend x 200 shares = $400.

So Evan will report $1,600 of income from its investment in Silva for year 2.