Consider a firm that has given stock options on 20,000 shares to its senior executives. These call options can be exercised at a price of $22 anytime during the next three years. The firm has a total of 500,000 shares outstanding, and the current price is $20 per share. The firm's net income before taxes is $2 million.
a. What would be the firm's pretax earnings per share if the options are not expensed?
b. Under certain assumptions, the Black-Scholes model valued the options given by the firm to its executives at $4 per share option. What would be the firm's pretax earnings per share if the options are expensed accordingly?
c. Under somewhat different assumptions, the Black-Scholes model valued the options at $5.25 per share option. What would be the firm's pretax earnings per share if the options are expensed based on this valuation?