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Under its executive stock option plan, N Corporation granted options on January 1, 2013, that permit executives to purchase 15 million of the company’s $1 par common shares within the next eight years, but not before December 31, 2015 (the vesting date). The exercise price is the market price of the shares on the date of grant, $18 per share. The fair value of the options, estimated by an appropriate option-pricing model, is $4 per option. No forfeitures are anticipated. Ignoring taxes, what is the effect on earnings in the year after the options are granted to executives? If unexpected turnover in 2014 caused the company to estimate that 10% of the options would be forfeited, what amount should M recognize as compensation expense for 2014?
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