Accounting for stock options. Lowe Corporation grants stock options to its managerial employees on December 3 1 of each year. Employees may acquire one share of common stock with each stock option. Lowe Corporation sets the exercise price equal to the market price of its common stock on the date of the grant. Employees must continue working for two years after the date of the grant before the options vest and employees can exercise them. This two-year period is the period of benefit Exhibit 12.1 1 presents information for the stock options granted by Lowe Corporation on December 3 1 of each year.

EXHIBIT 12 11 St

(P ock robl Op em tion 3 5)

Data for Lowe Corpora tion Year Options Granted during Year Option Price per Share Option Value per Share 1 5,000

$18 2 $2.40 6,000

$22 3 $3.00 7,000 4 $25 $3.14 8,000

$30 5 $3.25 9,000 $38 $5.33 Assume that Lowe Corporation accounts for its stock options using the market value method.

Calculate the effect of the stock options on net income before income taxes for Years 1 to 5.