Accounting for Decision Making and Control 6th Edition by Jerold Zimmerman

Exercise 37

A large public accounting firm, reporting the findings of a survey on corporate directors' compensation, remarked, "Since there are usually greater growth rates in smaller companies, stock options offer directors a good chance at investment appreciation at no cost to the company."
A stock option has the following characteristic. Suppose one three-year stock option is granted to a director at today's stock price of $10. Then, at any time over the next three years, the director can buy one share of stock from the company at $10. If next year the stock rises to $14, the director can exercise the option by paying $10 to the company and receiving one share of stock, which can then be sold in the market for $14, thereby realizing a $4 gain.
What cost does the company incur by granting stock options to its directors