Financial Reporting, Financial Statement Analysis and Valuation
8th Edition
ISBN: 9781285190907
Author: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Question
Chapter 7, Problem 22PC
a.
To determine
Consider why the corporation arranged the stock option grants every year in this way.
b.
To determine
What are the most likely causes for the rise in the fair value of options awarded per share from Year 2 to Year 3?
c.
To determine
Calculate the difference between the amount the company received from stock option exercises last year and the amount it would have received if it had sold the same number of shares on the open market.
d.
To determine
Explain why the company is ready to trade shares of its stock to workers at a much cheaper price (average option exercise price) than it will get for shares sold on the open market (average market price at time of exercise).
e.
To determine
Calculate the impact of equity-based compensation on net income for each year, assuming stock option compensation cost equaled the difference between the market price and the exercise price of exercised options.
f.
To determine
Explain the advantages and disadvantages of each of the following methods for calculating the cost of stock options:
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
A) The factors on which capital structure is dependent on
Select one:
a. Government Policy
b. Cost of capital
c. Requirement of investors
d. All the options
B) If Dhofar Popcorn is issuing preferred stock at OMR 95 per share, with a stated dividend of OMR 15, and a flotation cost of 2.15%, then what is the cost of preferred stock?
Select one:
a. 15.13%
b. 10%
c. 16.13%
d. 15%
e. None
Give typing answer with explanation and conclusion
Devon Ltd.'s common stock is trading at $40 and has an estimated price to earnings (P/E) ratio of 32.
price to earnings (P/E) ratio is estimated at 32.
If Devon borrows funds to repurchase shares at its after-tax cost of debt of 5%, it is likely that its earnings per share will be
If Devon borrows funds to repurchase shares at its after-tax cost of debt of 5%, it is likely that its earnings per
share will:
Options for Question :
A. increase.
B. decrease.
C. stay the same.
You are an investment adviser. One of your clients approaches you for your advice on investing inequity shares of Theta Company. You have collected the following data:Earnings per share last year $6.00Payout ratio 0.40Return on equity 0.30Cost of equity capital 0.20The company plans to increase the payout ratio to 60% from year 5.Required:i) Estimate the price of an equity share of this company using an appropriate dividenddiscount model and advise your client whether they should buy a share of the company.ii) Your client is keen to know whether there are any growth opportunities from theirinvestment. Explain to your client the meaning of this concept using appropriatecalculations.iii) If there are positive or negative growth opportunities, explain the reason for suchopportunities.
Chapter 7 Solutions
Financial Reporting, Financial Statement Analysis and Valuation
Knowledge Booster
Similar questions
- Assume Technical Investors is thinking about three different size offerings for issuance of additional shares. What is the percentage underwriting spread for each size offer? Size of Offer: Public Price: Net to Corporation: A: 1.1 million $30 $27.50 B: 7.0 million $30 $28.44 C: 28.0 million $30 $29.15arrow_forwardASSUME that the one year returns for COMPANY A are still (25%, -15%, 120%, -30%, -45%}. Assume also that you acquired shares in COMPANY B, which has had annual returns over the same period, of: {27; 35%; -10%; 10%; -15%}. What is the correlation between the returns on COMPANY A and COMPANY B shares? Multiple Choice 0.567 - 0.356 0.278 - 0.204 Assume that you own a portfolio comprised of 45% COMPANY A and 55% COMPANY B. What return do you expect to earn next year on this portfolio? Multiple Choice 9.74% 13.58% 10.12% 15.25%arrow_forwardA company wishes to raise funds by issuing either bonds or cumulative preferred stock. How will the annual interest or dividend affect total liabilities each year? a. Interest is a current liability each year (until paid) b. Interest and cumulative preferred dividends in arrears are non-current liabilities each year (until paid) c. Cumulative preferred dividend in arrears are a current liability each year (until paid) d. Both interest and cumulative preferred dividends in arrears are current liabilities each year (until paid)arrow_forward
- 2. The market value of the stocks of Sun Corporation at the beginning of year 1 is P150 per share; at the beginning of year 2 is P180. It declares divided of P20 per share. What is the holding period return from the said investment?arrow_forwardO Below is the stock price and dividend history for No-Cameras-Allowed Inc. (NCA), a company organizing Las Vegas retreats for investment banks. Stock Price (end-of-year) Dividend (paid during the year) Year 2019 90 180 18 2020 2021 120 6. a. Compute the annual return in 2020 and 2021. b. Compute the arithmetic average return over the 2019–2021 period. c. Compute the geometric average return over the 2019–2021 period. d. You buy 2,000 shares of NCA at the end of 2019 and hold them through the end of 2021. You reinvest any dividends received (i.e., you use the dividend proceeds to buy more shares of NCA). Except for reinvestment of dividends, you neither buy nor sell any shares before the end of 2021. Which average, arithmetic or geometric, better captures your investment performance over the 2019–2021 period? Please provide a brief explanation for your answer. B Focus MacBook Proarrow_forwardSelect from the option list provided the appropriate balance sheet classification for each balance sheet item below. Each choice may be used once, more than once, or not at all. Balance sheet item 1. Preferred stock 2. Trade accounts payable 3. Bonds payable (due in 15 years) 4. Note payable (due in 7 months) 5. Direct costs of issuing common stock 6. Treasury stock (at cost) 7. Appropriation for contingencies 8. Common stock subscriptions receivable 9. Discount on bonds payable 10. Bonds payable issue costs Select an option below O Current liabilities O Noncurrent liabilities O Capital stock O Additional paid-in capital O Retained earnings O Other classification Classification 6 Earrow_forward
- XYZ stock price and dividend history are as follows: Dividend Paid at Year-End $5 Year 2018 2019 2020 2021 Beginning-of- Year Price $ 130 144 120 125 An investor buys six shares of XYZ at the beginning of 2018, buys another three shares at the beginning of 2019, sells one share at the beginning of 2020, and sells all eight remaining shares at the beginning of 2021. Required: a. What are the arithmetic and geometric average time-weighted rates of return for the investor? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Arithmetic time-weighted average returns Geometric time-weighted average returns 5 5 5 Date b-1. Prepare a chart of cash flows for the four dates corresponding to the turns of the year for January 1, 2018, to January 1, 2021. (Negative amounts should be indicated by a minus sign.) Cash Flow % %arrow_forwardb. A certain company gave out P25 dividend per share for its common stock. Themarket value of the stock is P92. Determine the stock yield ratio.c. A property holdings declared a dividend of P9 per share for the common stock. Ifthe common stock closes at P76, how large is the stock yield ratio on thisinvestment?d. Find the amount of the semi-annual coupon for a P250,000 bond which pays 7%convertible semi-annually for its coupons.arrow_forwardXYZ stock price and dividend history are as follows: Dividend Paid at Year-End Year 2018 2019 2020 2021 Beginning-of- Year Price $ 120 129 115 120 An investor buys six shares of XYZ at the beginning of 2018, buys another two shares at the beginning of 2019, sells one share at the beginning of 2020, and sells all seven remaining shares at the beginning of 2021. Required: a. What are the arithmetic and geometric average time-weighted rates of return for the investor? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Arithmetic time-weighted average returns Geometric time-weighted average returns % [%arrow_forward
- The expected pretax return on three stocks is divided between dividends and capital gains in the following way: Stock Expected Dividend Expected Capital Gain A $0 $10 B 5 5 C 10 0 Required: a. If each stock is priced at $140, what are the expected net percentage returns on each stock to (i) a pension fund that does not pay taxes, (ii) a corporation paying tax at 21% (the effective tax rate on dividends received by corporations is 6.3%), and (iii) an individual with an effective tax rate of 15% on dividends and 10% on capital gains? b. Suppose that investors pay 50% tax on dividends and 20% tax on capital gains. If stocks are priced to yield an after-tax return of 8%, what would A, B, and C each sell for? Assume the expected dividend is a level perpetuity. If each stock is priced at $1.40, what are the expected net percentage on each stock to (i) a pension fund that does not pay taxes, (ii) a corporation paying taxes at 21% (the effective tax rate on dividends…arrow_forwardThe expected pretax return on three stocks is divided between dividends and capital gains in the following way: Stock Expected Dividend Expected Capital Gain A $0 $10 B 5 5 C 10 0 Required: a. If each stock is priced at $115, what are the expected net percentage returns on each stock to (i) a pension fund that does not pay taxes, (ii) a corporation paying tax at 21% (the effective tax rate on dividends received by corporations is 6.3%), and (iii) an individual with an effective tax rate of 10% on dividends and 5% on capital gains? Stock Pension investor corporation Individual A 8.70 % 6.86 % __________% B 8.70 % ___________% ___________% C 8.70 % __________% __________% b. Suppose that investors pay 40% tax on dividends and 10% tax on capital gains. If stocks…arrow_forwardThe expected pretax return on three stocks is divided between dividends and capital gains in the following way: Stock Expected Dividend Expected Capital Gain A $0 $10 B 5 5 C 10 0 Required: a. If each stock is priced at $110, what are the expected net percentage returns on each stock to (i) a pension fund that does not pay taxes, (ii) a corporation paying tax at 21% (the effective tax rate on dividends received by corporations is 6.3%), and (iii) an individual with an effective tax rate of 15% on dividends and 10% on capital gains? b. Suppose that investors pay 50% tax on dividends and 20% tax on capital gains. If stocks are priced to yield an after-tax return of 8%, what would A, B, and C each sell for? Assume the expected dividend is a level perpetuity. Req A Req B If each stock is priced at $110, what are the expected net percentage returns on each stock to (i) a pension fund that does not pay taxes, (ii) a corporation paying tax at 21% (the effective…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Financial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage Learning
Survey of Accounting (Accounting I)AccountingISBN:9781305961883Author:Carl WarrenPublisher:Cengage Learning
Financial Reporting, Financial Statement Analysis...
Finance
ISBN:9781285190907
Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:Cengage Learning
Survey of Accounting (Accounting I)
Accounting
ISBN:9781305961883
Author:Carl Warren
Publisher:Cengage Learning