On January 1, 2021, Farmer Fabrication issued stock options for 100,000 shares to a division manager. The options have an estimated fair value of $6 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 5% in three years. Suppose that Farmer initially estimates that it is not probable the goal will be achieved, but then after one year, Farmer estimates that it is probable that divisional revenue will increase by 5% by the end of 2023. Required: 1. What is the revised estimate of the total compensation? 2. What action will be taken to account for the options in 2022? 3. Prepare the journal entries to record compensation expense in 2022 and 2023.
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- The executive officers of Welsh Inc. have a performance based compensation plan.The performance criterion of this plan is linked to growth in earnings per share. Whenannual EPS growth is 10%, the executives of Welsh will earn 100% of the shares; ifgrowth is 15%, they earn 125%. If EPS growth, however, is lower than 8%, theexecutives receive no additional compensation.In 2020, Shelly Prince, the financial controller of Welsh, reviews year end estimatesof bad debt expense and warranty expense. She calculates EPS growth of 10%. Amember of the executive mentioned to her that the estimate of bad debt expensemight be decreased, increasing EPS growth to 15%. Shelly is not sure she shouldinclude this because she believes that the current bad debt expense is sound. She doesrecognize though, that a great deal of subjectivity was involved in its computation.Instructionsi. What, if any, is the ethical dilemma facing Shelly Prince? ii. Should Shelly’s knowledge of the compensation plan influence…The manager of Synergy Company's Stock Division projects the following for next year: Sales $221,870 Operating income 82,672 Operating assets 385,373 The manager can invest in an additional project that would require $58,427 investment in additional assets and would generate $9,772 of additional income. The company's minimum rate of return is $6%. What is the residual income for the Stock Division with the additional project. Do not round your intermediate calculations!!!On January 1, 2019, Phoenix Corporation adopts a performance-based share option plan for 25 executives, with the number of shares based on the yearly increase in sales. At the end of 2019, based on a 10% increase in sales, it expects that each executive will be granted 150 options and that the fair value of an option expected to vest is 15.75. Phoenix expects a turnover rate of 15% over the 3-year service period. Determine the compensation expense for 2019 for this plan.
- A limited is considering introducing an executive share option scheme. The scheme would be offered to all middle level managers of the company. It would replace the existing scheme of performance bonuses linked to the post tax earnings per share of the company. Such bonuses in the last year ranged between sh 500,000 and sh 700,000. If the option scheme is introduced, new options are expected to be offered to the managers each year. It is proposed that for the first year, all middle level managers be offered options to purchase 500,000 shares at a price of sh 5.00 per share, after the options have been held for one year. If the options are not exercised at that time, they will lapse. Assume that the tax authorities allow the exercise of such options after they have been held for one year. The company’s shares have a current market price of sh 6.10 per share. The dividend paid was sh 0.25 per share, a level that has remained constant for the last three years. Assume the dividends are…Marble Construction estimates that its WACC is 10 percent ifequity comes from retained earnings. However, if the company issuesnew stock to raise new equity, it estimates that its WACC will riseto 10.8 percent. The company believes that it will exhaust itsretained earnings at $2,500,000 of capital due to the number ofhighly profitable projects available to the firm and its limitedearnings. The company is considering the following seven investmentprojects: Project Size IRR A $650,000 14.0% B 1,050,000 13.5 C 1,000,000 11.2 D 1,200,000 11.0 E…The stock price of Wards Company is currently $35. Wards need to raise $25 million by issuing common stock. Underwriters have informed Wards’ management that it must price the new issue to the public at $40 per share to ensure that all shares will be sold. The underwriters’ compensation will be 8 percent of the issue price, so Wards will net $36.80 per share. The company will also incur expenses in the amount of $392,000. How many shares must Wards sell to net $25 million after underwriting and flotation expenses? Provide the quantitative reasoning/calculations you used to solve this question.
- Damiano Maggi is valuingYummy Doughnuts (YD), a company that sells a variety of doughnuts through both companies-owned locations and franchise locations. Damiano has made the following assumptions:Book value per share is estimated at $9.62 on 31 December 2022.EPS will be 22 percent of the beginning book value per share for the next three years.Cash dividends paid will be 30 percent of EPS.The beta for YD is 0.60, the risk-free rate is 5.00 percent, and the equity risk premiumis 5.50 percent.The current market price of YD is $59.38, which indicates a current P/B ratio of 6.2.Based on this information answer the questions below. 1. Estimate the residual income and its present value for the next three years. Please do not provide handwritten solution thnkuThe sales revenue of Business Strategy Limited for 2019 is $100 million. The CEO told the sales director in December of 2019 that the board had set a target of $145 million in sales revenue for 2022 and expected that there should be stable annual growth of sales over the 3 years. The board expects the growth rate will be maintained continuously in future years. The market has the same expectation of the board. Business Strategy Limited is expected to pay dividend of $20 per common stock at the end of the year 2020. The market price of the common stock at the beginning of 2020 is $1,000.What is the required rate of return on Business Strategy Limited’s common stock?In 2022, the ABC Food company has total assets of $46,690,000, cash balance of $3,875,000, sales growth of -3% (-0.03), loss indicator of 1, CFO change indicator of 0. If the manager decides to invest $325,000, does she/he overinvest or underinvest? Based on the threshold of $60,000, do you have to conduct a further investigation and why?
- The Beranek Company, whose stock price is now $25, needs to raise$20 million in common stock. Underwriters have informed the firm’s management that they must price the new issue to the public at $22 per sharebecause of signaling effects. The underwriters’ compensation will be 5% ofthe issue price, so Beranek will net $20.90 per share. The firm will also incurexpenses in the amount of $150,000. How many shares must the firm sell tonet $20 million after underwriting and flotation expenses?National Co., 65% owned by National Holdings Group, provides screening, diagnostic and therapeutic systems for the treatment of ophthalmologic (vision) problems. Reviewing the issue as of the beginning of October 2021, when it is trading for P19.10, Seth, a buy-side analyst covering National Co., forecast that the current dividend of P0.14 will grow by 15% per year during the next 10 years. Thereafter, Seth believes that the growth rate will decline to 8% and remain at that level indefinitely. Seth estimates National Co.’s required return on equity as 9.7%, based on a beta of 0.89, a 4.5% risk-free rate, and his equity risk premium estimate of 5.8%.What is the present value of the National Co.’s stock?While conducting a valuation study of Cross Corp for the annual update for the Trustees of the ESOP plan that owns a portion of the firm, you determine that the Terminal Value of the firm, at the end of a four-year Planning Period, is $120,070 (all $s in 000s). The firm’s capital structure is 30% debt and 70% equity, the cost of debt is 4%, and the cost of equity is 12%. The firm has a 24% tax rate. If the Present Value of Planning Period Cash Flows is $72,100, the Enterprise Value for Cross is: a. $72,100 b. $148,407 c. $156,194 d. $192,170 e. None of the above