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11 Cards in this Set
- Front
- Back
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What's wrong with the way in which companies usually account for stock options? |
When substituting stock compensation for cash compensation, firms: - Record reduced cash compensation (so increase profits) Have to calculate equivalent cash compensation cost of stock options to see if they are a good idea. |
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Do share issues from the exercise of employee stock options dilute share price? |
Yes. Issues shares below market price dilutes the per-share value of existing shares. |
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Do share repurchases reverse dilution? |
No. Repurchasing at market value has no effect on per-share value.
- Number of shares is reduced and EPS might increase so it may look like reverse dilution - But value per share doesn't change |
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Is the tax benefit from exercise of stock options actually a benefit/source of value? |
No. The net benefit (to shareholders) is:
Tax benefit - value given up to employees
This net amount is always negative as the tax benefit is derived by applying the tax rate to the value given up.
In there is any benefit to shareholders, it must be from the incentive effects of stock options. |
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Net transactions with common shareholders |
Capital contributions (share issues) - Share repurchases - Common dividends |
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What is dirty-surplus accounting? |
Reporting income items as part of equity rather than in the income statement
- Unrealized gains/losses - Foreign currency translation gains/losses |
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What are the benefits of a reformulated equity statement? |
1. Distinction between comprehensive income and transactions with shareholders so separates creation of value from raising of funds and distribution of value to shareholders 2. Enables the identification of ROCE and growth in equity - the two drivers of residual earnings |
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When does tax benefit occur? |
Only with employee stock options |
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What is a dirty-surplus item? |
Any item in shareholders' equity other than transaction with shareholders or net income from the income statement. |
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What is a hidden dirty-surplus expense |
Expense arising from issue of shares that is not recorded. The expense should be record as market value - issue value. |
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Are FCT gains/losses real? |
Yes. E.g. on repatriation. |
