On January 1, 2012, Guaymas Company established a stock option plan for its senior employees. A total of 550,000 options were granted that permit employees to purchase 550,000 shares of stock at $23 per share. Each option had a fair value of $6 on the grant date. The market price for Guaymas stock on January 1, 2012, was $23. The employees are required to remain with Guaymas for four years (2012, 2013, 2014, and 2015) in order to be able to exercise these options. Guaymas’ net income for 2012, before including any consideration of compensation expense, is $870,000.
1. Compute the compensation expense associated with these options for 2012 under the fair value method. Note that the period of time that the employees must work to be able to exercise the options is four years.
2. Interpretive Question: You are a Guaymas stockholder. What objections might you have to Guaymas’ employee stock option plan?
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