General Miller Case Study

1002 Words Feb 13th, 2012 5 Pages
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
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