Homework Accounting 2 Treasure Stock

In the open market share repurchase, the firm may or may not declare the repurchase. Depending on the market condition and the firm’s position in the industry, the firm can decide when and how many

Management considering share repurchase program should weigh its benefit of financial discipline, efficient corporate strategy implementation and utilization of tax shield against the downside of cost of financial distress. It’s not the possibility of bankruptcy that causes concerns among equity holders regarding extent of leverage but the direct costs (legal, liquidation, administrative etc.) and indirect costs (deteriorated corporate image, management time and attention, agency costs of value-destructing investment, distress asset sales etc.). Exhibit 4 lists the key assumption inputs of approximating quantitative firm value/ equity value accretion. Levering UST to a larger extent by adding $1,000m does increase firm value.

As a result, if the sale occurs before 2000, the profitability for A-D tranches will be negatively impacted by the ‘preferred’ characteristic in the Series E. However if the sale occurs after 2000, A and B tranches will be gradually redeemed on an annual basis, which will leave C and D tranches to be mostly impacted adversely by the preferred characteristic in the Series E stock.

The repurchase program increases the shareholder’s value. This is because of a rise in the price of the shares of the original shareholders.

2. Companies buy back shares on the open market over an extended period of time.

3. On the basis of the responses to Question 1 and 2, what are the units of accounting in this arrangement?

a) How many shares will the firm have to issue, assuming they issue the new shares at the current price per share?

- 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?

On the other hand, if George Inc. is not aware of the lawsuit, it will record the transaction just like any other repurchase transaction in its books of accounts. The most common method used for recording treasury stock is the "Cost Method". This transaction

a) Profit Sharing: return of some company’s profit to employees in the form of cash bonus or retirement supplement.

The redemption available after the third anniversary of the original issue date is weighted towards equity. This option guarantees that the investors will receive at least the principal back. The mandatory redemption behaves like debt because there is a definite maturity date. The protective covenants are also weighted toward debt because the risk is limited and gives priority to the Series B Preferred Stockholders. Dividends are usually associated with equity; however, in this case the dividends are behaving more like debt interest payments. The dividends are paid at a fixed 8%

However, at issue is the calculation of compensation expense for the years subsequent to the change in exercise price and vesting period. FAS 123(R) 51 states that a modification of the terms or conditions of an equity award shall be treated as an exchange of the original award for a new award. 51 further states that in substance, the entity repurchases the original instrument by issuing a new instrument of equal or greater value,

Another factor for management to consider would involve the clientele effects. Presently the Wrigley family controls 21% of common shares and 58% of Class B common stock. Assuming the Wrigley family do not sell any shares, the repurchase will raising their voting control from 46.6% to a majority control over voting rights at 50.6% (see appendix2.2). This isn’t deemed significant as the Wrigley family already previously possessed majority of voting rights

If A/P increases from one year to the next, that means that the difference between the two amounts is cash that was available for current use. That is, instead of paying cash, whatever was purchased was put on an account. On the other hand, A/R is considered a use of cash because for every dollar that should be coming in to the company from those who owe the company money, that cash has been delayed for a collection time period. Therefore, the company does not have the money to use for its own operations.

* issuance of debt to repurchase and retire shares in fiscal years 1998 and then again in 1999