Yahoo case 1. Should stock options be counted as an expense? Stock options should be counted as an expense for the fact that they represent something of value, even though this value is not always precisely estimated. a. Make the argument for counting them as expenses. The company gives the owners of call options the right yet not the obligation to buy the specified stock at a certain time at a certain price. The reasonable owner of stock options will buy the stock at the specified price only if it is less than the current market price.
Such right albeit uncertain is considered to be expenditure for the company and therefore should be expensed. Even if the stock options are never exercised, this somewhat conservative (or critical path method) approach to the financial statements would not inflate the corporate earnings and thus trick the shareholders. b. Make the argument against counting them as expenses. The fact that it is difficult to determine the precise value of the stock option compensation package makes it extremely difficult to count them as an expense. The fact that in theory the stock price can indefinitely grow on one hand (thus making the stock option expenses for the company indefinitely large) or fall on the other hand (thus making the stock options of zero value), poses too great of uncertainty to count something highly uncertain as an expense for the company. c. Come to a conclusion about which argument is more persuasive.
The Essay on Stock Options Performance Company Option
The purpose of incentive schemes for executives is to align their objectives with those of the owners of the company; this is what people refer to as solving the principal-agent problem. In a company, shareholders are principals and managers are agents. The main argument in favour of stock option plans is that they give executives a greater incentive to act in the interests of shareholders by ...
The expensing argument appears to be more persuasive for the fact that the stock options are granted on the general assumption that they would yield some value to their owners, despite the difficulty of the value/expense assessment. There is no doubt that options that are in the money should be expensed, despite the fact that non-compensatory option plans are not expensed. The Black-Scholes model for options provides although vague yet somewhat reasonable estimation and the justification for the fair value method in option expensing. It is no wonder that FASB in SFAS N.123 encouraged yet not obliged the companies to use the fair value and not intrinsic value method in stock-based compensation: to suffice those who oppose and support expensing of stock option compensation plans. d. Who are the main players on each side of the argument? You can consider industries (high tech), regulators (SEC and FASB), and influential politicians.
High tech industries oppose the expensing of the stock option plans due to their extensive use of stock option plans for Motivating employees to high level performance compensation purposes Retaining executives and allowing for recruitment of new talent. Base compensation on employee and company performance Maximization the employees after-tax benefit and minimization the employees aftertax cost Performance criteria over which the employee has control. SEC was prompted by senator Joseph Liebermann of Connecticut to allow the companies ignore any FASB rule requiring expensing of stock-option values. FASB, although initially being pro fair value proposal, after the SEC allowed the companies to ignore expensing of stock option values, issued SFAS 123 which encouraged the fair value method yet did not demand that from the companies. 2. The articles make reference to a study which suggests that firms which give a high percentage of options to the top five executives are the poorest performing firms.
A list of these firms and their tickers are below. An interesting question is how these firms have performed over the last several years. Have these firms outperformed the market? To answer this, do the following: a. Determine the calendar 2000, 2001, and 2002 “raw” stock percentage returns for each firm. (for visual representation please refer to the addendum).
The Essay on Stock Management Firm Ensure Time
Q. (a) Why is it important for a firm to ensure efficient stock management? (b) Outline and evaluate methods of stock management which firms use. Stock management is defined as the control of stock to ensure that it is adequate for immediate needs without using up excessive financial resources. Stock costs are an important aspect of a firm's overall costs. This means that firms ensure that ...
Raw Percentage returns for the firms (%) Company 2000 2001 2002 Fleming Cos Inc -25 2 -60 Riggs Natl CP -50 -48 -25 Rowan Co Inc.
-3 -40 -2 Stewart Ent. A -75 -60 -62 Abercr Fitch +50 +60 +50 4 Kids Ent. +1200 +1600 +1560 Bassett Furn -52 -27 -54 Crown CRC and Seal -75 -85 -64 DPL Inc +90 +60 +5 Campbell Soup -40 -40 -50 Lubys Inc -70 -65 -80 Donnelley -25 -15 -25 Northeast Utilities +80 +50 +25 b. Determine the calendar 2000, 2001, and 2002 stock percentage returns for the S&P 500 index. Index 2000 2001 2002 S&P 500 32 10 -12 c. Determine the abnormal return for each firm for 2000, 2001, and 2002.
The abnormal return is simply the firm’s return for 2000 less the S&P 500 return for 2000. Company 2000 2000 abnormal return (+32% for S&P 500) Fleming Cos Inc -25 -57 Riggs Natl CP -50 -82 Rowan Co Inc. -3 -35 Stewart Ent. A -75 -107 Abercr Fitch 50 18 4 Kids Ent. 1200 1168 Bassett Furn -52 -84 Crown CRC and Seal -75 -107 DPL Inc 90 58 Campbell Soup -40 -72 Lubys Inc -70 -102 Donnelley -25 -57 Northeast Utilities 80 48 d. For each year 2000, 2001, and 2002: i.
What is the average abnornal return? Average abnormal return 45.30769231 ii. What is the median abnormal return? Median Abnormal return -57 iii. What percent of the abnormal returns are positive? % of abnormal return positive 0.307692 30.76923 % iv. What is the t-statistic for each year? T-stat for the year 2000 0.3614167 2001 0.1277034 2002 0.5927546 e. What conclusions can you make from the above stock return data? Use both words and numbers. For yahoo, find the proxy statement, and determine: 1. The % of options granted in 2001 that went to the top 5 executives.
According to the Yahoo proxy statement at http://eol.finsys.com/edgar_conv_html/2002/03/15/0 000912057-02-010171.html , more than 20% (20.6869%) are granted to top 5 executives at Yahoo acc 2. The total compensation for the top 5 executives, assuming each option granted in 2001 was worth $50 per option. For top 5 executives assuming the stock price go up to $50 the total compensation would equal $1,636,270,645 (transaction costs + option prices ignored).
The Term Paper on Google and Yahoo! Financial Performance
Financial ratios are used by companies, investors, and by students. The purpose of financial ratios is to determine the whether a company is able to pay off debts, use its assets to regenerate cash, or determine how much profit a company is making from every dollar they make. A study of two internet giants, Google and Yahoo!, will show that although one company is not generating as much as the ...
3. The potential amount of money each of the top 5 can make under various assumptions. # of shares exercise price Value Now: if stock goes to $50 stock $60 Stock $40 Terry Semel 11000000 30.67 337370000 212630000 322630000 102630000 Timothy Koogle 17066120 9.55 162981446 690324554 860985754 519663354 Jeffrey Mallett 11040008 11.21 123758489.7 428241910.3 538641990.3 317841830.3 Susan Decker 1375000 64.37 88508750 -19758750 -6008750 -33508750 Farzad Nazem 7759984 8.14 63166269.76 324832930.2 402432770.2 247233090.2 Total : 1636270645 2118681765 1153859525 Bibliography: http://eol.finsys.com/edgar_conv_html/2002/03/15/0 000912057-02-010171.html finance.yahoo.com/ (chart for various companies) Bloomberg.com (prepaid services archive) Faxed packaged: (Yahoo Stock based compensation package) Addendum: .
