1. When shares of common stock are issued to satisfy the exercise of employee stock options, are the shares issued from the Company’s “authorized but previously unissued shares” or from the Company’s “treasury stock”? Where in the financial statements do you find this information?
(page 44) According to the 10-K, the Company’s common stock remains the same in 2011 and 2010 (75.5 million) while the treasury stock increased from 2615.2 to 3210.3 million, which means the Company didn’t issue any “authorized but previously unissued shares” this year but satisfied the exercise of employee stock options by using the treasury stock they bought in fiscal year 2011.
2. Based on the assumptions used for the Black-Scholes option-pricing model
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(page 43 & 67)
Basic EPS = (net income – preferred dividends) / weighted average number of common shares outstanding = 1798.3/(754.6-109.8) = 2.8
Diluted EPS = (net income – preferred dividends) / (weighted average number of common shares outstanding + increment in common shares)
Since there is not enough information to calculate the increment in common shares, the diluted EPS cannot be proved in this case.
6. Explain the earnings per share amount that you would recommend an investor should use to evaluate the company.
(page 66) I would recommend an investor use the diluted EPS. For investors, it is important to value the business assuming all possible dilution that can take place will take place. According to the 10-K, the amount of exercised stock option is quite large annually, which means the increment in common shares is considerable. Using the diluted EPS will help the investor to evaluate the Company in a big picture.
7. How much would the diluted earnings per share be if the stock price were high enough to make all the stock options “in the money.” Assume that the exercise price of all stock options is $2 less that the average market price for 2011.
(page 66 & 67) According to the 10-K, the exercise price is 22.59 per share, so we can conclude that the average market price is 24.59.
The shares issued from assumed exercise = 81104.6 + 5234.3 = 86338.9 thousand
Shares
Earnings per share (EPS) is defined as net income divided by the number of shares of stock issued to stockholders. Higher EPS values indicate the company is earning more net income per share of stock outstanding. Because EPS is one of the five performance measures on which your company is graded (see p. 2 of the GSR) and because your company has a higher EPS target each year, you should monitor EPS regularly and take actions to boost EPS. One way to boost EPS is to pursue actions that will raise net income (the numerator in the formula for calculating EPS). A second means of boosting EPS is to repurchase shares of
Assumptions need to be made for the Cost of Equity. We used the corporate rate of 11.766%
Prompt: Once you have read the article “Comparing the Accuracy and Explainability of Dividend, Free Cash Flow, and Abnormal Earnings Equity Value Estimates” and Chapters 6 and 7 of your text, review and complete the questions below. Use the article and your text to inform your responses to the questions below.
5.4. The backend offer would not materialise until late 1997, therefore the effective offer could be even less. If the cost of capital is 16.45% (more later), then the 60% shareholders will get $4.712bn/1.1645 = $4.04bn which effectively translates to $81.67/share ($3.03bn+$4.04bn/90.5m shares)
Their authorized capital stock consists of 800 million shares and then 300 of them are issued common stock.
5. A company had outstanding 80,000 shares of $10 par value common stock. During the
b) What will be the total equity value and equity price per share after the issuance is completed?
- A firm has a market value equal to its book value. Currently, the firm has excess cash of $1,200 and other assets of $10,800. Equity is worth $12,000. The firm has 750 shares of stock outstanding and net income of $775. What will the new earnings per share be if the firm uses its excess cash to complete a stock repurchase?
Shareholder’s equity would be lower than that shown in 1982 ($318,000) because the company has to pay off interest and principal for many loans. There will be little money left for shareholder’s equity.
The return on equity (ROE) has also shown an increase in 2009 over the previous year suggesting a successful investment by shareholders. This increase, coupled with the fact that the basic earnings per share (EPS) has increased significantly from 61.78 cents in 2008 to 88.26 cents in 2009 (143%) shows great improvement in the profit per share. Please note that the basic EPS has been used in this analysis as the diluted EPS includes employee options (JBH Annual Report, 2009), skewing and reducing the value of the EPS.
$10,644,800 / $2,271,400 = 4.69 Times Return on Common Stockholders’ Equity (2002) $647,645 / $1,928,960 = 33.58% Return
A graph below represents Earning per Share ratio. EPS ratio is used when the company wants to know how are they doing in their businesses from year to year. EPS is shown in pence. (Dyson, 2010) A year 2009 was not so profitable for company as EPS was -2,79p. This means that business was making little money, which was not good for shareholders. However, in 2010 the EPS was quite high, 14,76p, what means the company is making profit and shareholders want to invest in business.
FAS 123(R) 5 states that an entity should recognize services received in a share based payment transaction when those services are received. 10 states that an entity shall account for compensation cost from share-based payment transactions with employees in accordance with the fair-value-based method. Under the fair-value-based method, the cost of services received from employees in exchange for awards of share-based compensation shall be measured based on the grant-date fair value of the equity instruments issued. A10-A17 discuss the acceptable methods of calculating fair value at the grant date. The grant-date fair value of the Murray options is $6. Following the guidance in Illustration 4(a), Share Options with Cliff Vesting, of FAS 123(R), compensation expense for the years ended December 31, 2006 & 2007 is $200,000 per year (calculation attached hereto).
Dilution of shares seems have to have little impact on the EPS of PG shares. Therefore, it is expected that PG shareholders would accept the issuing of shares. However, this information has to be clearly communicated by PG's management to its shareholders in order to gain
MCI’s estimated EPS for 1996 is $3.75. When the number of shares declines to 608.93 after repurchase, EPS would rise. Assuming the earnings forecast for 1996 materializes, EPS would rise to $1.96. This is calculated using the formula below.