Identifying and Analyzing Financial Statement Effects of Share-Based Compensation Weaver Industries implements a new share-based compensation plan in 2014. Under the plan, the company’s CEO and CFO each will receive non-qualified stock options to purchase 100,000, no par shares.

The options vest ratably (1/3 of the options each year) over three years, expire in 10 years, and have an exercise (strike) price of $27 per share. Weaver uses the Black-Scholes model to estimate a fair value per option of $18.

Required

a. Use the financial statement effects template to record the compensation expense related to these options for each year 2014 through 2016.

b. In 2017, the company’s stock price is $24. If you were the Weaver Industries CEO, would you exercise your options? Explain.

c. In 2019, the company’s stock price is $46 and the CEO exercises all of her options. Use the financial statement effects template to record the exercise.

P8-61.AInterpreting Disclosure on Employee Stock Options Including Tax Benefit Intel Corporation reported the following in its 2015 10-K report.

Share-Based Compensation Share-based compensation recognized in 2015 was $1.3 billion

($1.1 billion in 2014 and $1.1 billion in 2013). . . .During 2015, the tax benefit that we realized for the tax deduction from share-based awards totaled $533 million ($555 million in 2014 and $385 million in 2013). . . . We use the Black-Scholes option pricing model to estimate the fair value of options granted under our equity incentive plans and rights to acquire stock granted under the 2006 Plan and rights to acquire shares of common stock under the 2006 Stock Purchase Plan. No options were granted in 2015.

We based the weighted average estimated value of employee stock option grants and rights granted under the stock purchase plan, as well as the weighted average assumptions used in calculating the fair value, on estimates at the date of grant, as follows:

Stock Options Stock Purchase Plan 2015 2014 2013 2015 2014 2013 Estimated values . . . . . . . . n/a $3.61 $3.11 $6.56 $5.87 $4.52 Expected life (in years) . . . . n/a 5.1 5.2 0.5 0.5 0.5 Risk-free interest rate . . . . . n/a 1.7% 0.8% 0.1% 0.1% 0.1%

Volatility . . . . . . . . . . . . . . . n/a 23% 25% 25% 22% 22%

Dividend yield. . . . . . . . . . . n/a 3.6% 3.9% 3.1% 3.2% 4.0%

Additional information with respect to stock option activity is as follows:
In millions Number of Options Weighted Average Exercise Price December 29, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . 202.8 $20.20 Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.1 $22.99 Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (65.0) $18.76 Cancelled and forfeited . . . . . . . . . . . . . . . . . . . . . . (3.0) $22.58 Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.9) $22.56 December 28, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . 153.0 $21.10 Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.6 $25.34 Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (63.7) $19.87 Cancelled and forfeited . . . . . . . . . . . . . . . . . . . . . . (2.7) $23.70 Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9.9) $27.00 December 27, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . 77.3 $21.30 Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — $ —
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (21.9) $20.34 Cancelled and forfeited . . . . . . . . . . . . . . . . . . . . . . (1.1) $23.23 Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.1) $20.87 December 26, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . 54.2 $21.65 Options exercisable as of:
December 28, 2013 . . . . . . . . . . . . . . . . . . . . . . . 111.5 $20.25 December 27, 2014 . . . . . . . . . . . . . . . . . . . . . . . 54.7 $20.29 December 26, 2015 . . . . . . . . . . . . . . . . . . . . . . . 43.8 $21.07 Required

a. What did Intel expense for share-based compensation for 2014? How many options did Intel grant in 2014? Compute the fair value of all options granted during 2014. Why do the fair value of the option grants and the expense differ?

b. Intel used the Black-Scholes formula to estimate fair value of the options granted each year. How did the change in volatility from 2013 to 2014 affect share-based compensation in 2014? What about the change in risk-free rate?

c. How many options were exercised during 2015? Estimate the cash that Intel received from its employees when these options were exercised.

d. What was the intrinsic value per share of the options exercised in 2015? If employees who exercised options in 2015 immediately sold them, what “profit” did they make from the shares? (Assume that Intel’s stock price was $32.19, on average, during fiscal 2015.)

e. The tax benefit that Intel will receive on the options exercised is computed based on the intrinsic value of the options exercised. Estimate Intel’s tax benefit from the 2015 option exercises assuming a tax rate of 37%.

f. What was the average exercise price of the 0.1 million options expired in 2015? Explain what benefit the employees lost by not exercising their options.