Each tranche has the same exercise price— the market price of the stock on the grant date, or $ 23 on January 1, 2010. Explain why the option fair value increases with the vesting date.

Each tranche has the same exercise price— the market price of the stock on the grant date, or $ 23 on January 1, 2010. Explain why the option fair value increases with the vesting date.

Starbucks
Corp., the passionate purveyors of coffee and everything else that goes with a
full and rewarding coffeehouse experience, included the following table in its
2009 annual report:

Total
stock based compensation and ESPP expense recognized in the consolidated
financial statements


Fiscal Year Ended


(
in millions)

Sep 27, 2009

Sep
28, 2008

Sep 30, 2007

Stock
option expense

$ 61.6

$
57.6

$ 92.3

RSU expense

16.6

5.6

ESPP
expense

5.0

11.8

11.6

Total
stock- based compensation expense on

$ 83.2

$
75.0

$ 103.9

the
consolidated statements of earnings




Total
related tax benefit

$ 29.3

$
24.0

$ 35.3

Starbucks maintains several share- based
compensation plans that permit the company to grant employee stock options,
restricted stock, and restricted stock “units” or RSUs. Starbucks also has an
employee stock purchase plan (“ESPP”) that allows participating employees to
buy shares at a discounted price. At some companies, the discount can be as
much as 15% lower than the prevailing market price. Stock options to purchase
Starbucks’ common shares are granted at an exercise price equal to the market
price of the stock on the date of grant. Most options become exercisable in
four equal installments beginning one year from the date of the grant and
expire 10 years from the date of grant. Suppose Starbucks issues 100,000
employee stock options on January 1, 2010, and that one-fourth of the options
vest in each of the next four years, beginning on December 31, 2010. For
financial reporting purposes, the company elects to separate the total award
into four groups (or tranches) according to the year in which each vests.
Starbucks then measures the compensation cost for each vesting date tranche as
if it was a separate award. The following table provides details about each
vesting tranche:

Vesting Date

Shares Vesting

Fair Value per
Option

Dec. 31, 2010

25,000

$ 2.00

Dec. 31, 2011

25,000

$ 3.20

Dec. 31, 2012

25,000

$ 4.80

Dec. 31, 2013

25,000

$ 7.00

Requirements

Prepare
a letter to the President of Starbucks to answer the following questions.

  1. Each
    tranche has the same exercise price— the market price of the stock on the
    grant date, or $ 23 on January 1, 2010. Explain why the option fair value
    increases with the vesting date.

Price: £ 45

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