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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 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 after tax cost Performance criteria over which the employee has control. SEC was prompted by senator Joseph Lieberman n 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). 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 abnormal 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 web, 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). 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 See
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 Name
7759984
8. 14
63166269. 76
324832930. 2
402432770. 2
247233090. 2
Total:
1636270645
2118681765
1153859525
Bibliography: web finance. yahoo. com/ (chart for various companies) Bloomberg. com (prepaid services archive) Faxed packaged: (Yahoo Stock based compensation package) Addendum:
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