2. For the case below and under the (current) fair value method, which fair value and how many shares should be used in calculating compensation expense? (5pts)

How much compensation should the company record for the first year? (5pts)

A company issued to certain employees 1000 shares of stock option awards. The grand-date market price is $250 per share, exercise price is $200 per share, and the fair value of the options based on the Black-Scholes option-pricing model is $60 per share. A performance condition is included such that the employee will vest 60% in the awards if cumulative net income is greater than $5 million in the succeeding four-year period, and 50% if otherwise. The company believes it is likely that it will exceed the $5 million income target. The company also indicates that the fair value of the option factoring performance condition is $45.