The document proposes a new type of employee stock option called Dynamic Employee Stock Options (DESOs). DESOs are designed to better achieve the goals of traditional employee stock options (TESOs) by addressing structural problems with TESOs. With DESOs, upon exercise the employee would receive a percentage of shares (e.g. 75%) and new stock options rather than 100% of shares. This reduces risk for employees and better aligns their interests with shareholders over the long run compared to TESOs. The document provides an example of how DESOs would work compared to TESOs.
This new design of employee stock options is an improvement for all parties. It enhances the purposes of the grants, and it helps the grantees more easily manage their grants. It helps the companies create earlier cash flows and allows for efficient risk reduction for employees and executives. It even helps the wealth management get earlier Assets Under Management.
This presentation describes a New and Superior Design of Employee Stock Options which benefits all parties, the employer, the grantee and the Wealth Managers. It extends alignment, creates early cash flow to the employer, allows efficient risk management by the grantees without hedging and gives early Assets Under Management to the Wealth Managers.
www.truthinoptions.com
olagues@gmail.com
504-875-4825
- The cost of capital is the minimum required rate of return for a project given its riskiness, while the firm's cost of capital is the weighted average required return across all projects.
- The cost of capital is used for investment decisions, debt policy design, and evaluating management performance.
- It represents the expected return forgone by investing in a project rather than the next best alternative of similar risk. Various capital sources have different costs depending on their risk.
- The weighted average cost of capital (WACC) is calculated by weighting the costs of different capital sources by their proportion of the total capital structure.
This document discusses how to divide employee stock options in a divorce. It defines key terms related to stock options like grant date, exercise price, vesting date, and expiration date. It explains the two main types of stock options - nonqualified options and incentive stock options - and how they differ in tax treatment and transferability. It also covers valuation methods like the HUG formula and Nelson formula, how to determine the community property share, and considerations for dividing and distributing the stock options between spouses.
This document provides solutions to 10 illustrations related to calculating the cost of various sources of capital such as debt, equity and preference shares.
In the first illustration, the document calculates the cost of irredeemable debt issued at par, premium and discount by determining the interest rate after accounting for tax. The second illustration does the same calculation for redeemable debentures.
Subsequent illustrations calculate costs for alternative modes of debt, irredeemable and redeemable preference shares, equity using the dividend price approach and earnings price approach. The last two illustrations value equity shares using the dividend discount model and present value of future dividend flows approach.
The document thus provides step-by-step workings and solutions to calculate
ESOPs are popular employee retention programs that allow employees to purchase company shares. Some key points:
- ESOPs give employees options to buy company shares in the future at a preset price, rewarding performance and loyalty.
- Over 63% of Indian companies surveyed had or planned to implement ESOP programs to attract and retain talent.
- ESOPs can be structured as direct grants to employees or through an employee trust to administer the program.
- Regulatory requirements depend on if the company is listed or not. Listed companies must follow additional SEBI guidelines.
The document discusses various long-term incentive plan (LTIP) options for companies to use to attract, retain, and motivate top talent. It presents 9 alternatives for long-term value sharing plans, including stock options, restricted stock, phantom stock, and profit pools. For each option, it outlines whether the plan provides equity or not, is based on appreciation or full value, and whether it rewards value increases or financial performance. The document advocates that long-term value sharing is important to attract the best talent, reinforce a company's business model, and build an ownership mindset among employees. It provides steps for selecting and implementing an LTIP to share in a company's future value creation.
This new design of employee stock options is an improvement for all parties. It enhances the purposes of the grants, and it helps the grantees more easily manage their grants. It helps the companies create earlier cash flows and allows for efficient risk reduction for employees and executives. It even helps the wealth management get earlier Assets Under Management.
This presentation describes a New and Superior Design of Employee Stock Options which benefits all parties, the employer, the grantee and the Wealth Managers. It extends alignment, creates early cash flow to the employer, allows efficient risk management by the grantees without hedging and gives early Assets Under Management to the Wealth Managers.
www.truthinoptions.com
olagues@gmail.com
504-875-4825
- The cost of capital is the minimum required rate of return for a project given its riskiness, while the firm's cost of capital is the weighted average required return across all projects.
- The cost of capital is used for investment decisions, debt policy design, and evaluating management performance.
- It represents the expected return forgone by investing in a project rather than the next best alternative of similar risk. Various capital sources have different costs depending on their risk.
- The weighted average cost of capital (WACC) is calculated by weighting the costs of different capital sources by their proportion of the total capital structure.
This document discusses how to divide employee stock options in a divorce. It defines key terms related to stock options like grant date, exercise price, vesting date, and expiration date. It explains the two main types of stock options - nonqualified options and incentive stock options - and how they differ in tax treatment and transferability. It also covers valuation methods like the HUG formula and Nelson formula, how to determine the community property share, and considerations for dividing and distributing the stock options between spouses.
This document provides solutions to 10 illustrations related to calculating the cost of various sources of capital such as debt, equity and preference shares.
In the first illustration, the document calculates the cost of irredeemable debt issued at par, premium and discount by determining the interest rate after accounting for tax. The second illustration does the same calculation for redeemable debentures.
Subsequent illustrations calculate costs for alternative modes of debt, irredeemable and redeemable preference shares, equity using the dividend price approach and earnings price approach. The last two illustrations value equity shares using the dividend discount model and present value of future dividend flows approach.
The document thus provides step-by-step workings and solutions to calculate
ESOPs are popular employee retention programs that allow employees to purchase company shares. Some key points:
- ESOPs give employees options to buy company shares in the future at a preset price, rewarding performance and loyalty.
- Over 63% of Indian companies surveyed had or planned to implement ESOP programs to attract and retain talent.
- ESOPs can be structured as direct grants to employees or through an employee trust to administer the program.
- Regulatory requirements depend on if the company is listed or not. Listed companies must follow additional SEBI guidelines.
The document discusses various long-term incentive plan (LTIP) options for companies to use to attract, retain, and motivate top talent. It presents 9 alternatives for long-term value sharing plans, including stock options, restricted stock, phantom stock, and profit pools. For each option, it outlines whether the plan provides equity or not, is based on appreciation or full value, and whether it rewards value increases or financial performance. The document advocates that long-term value sharing is important to attract the best talent, reinforce a company's business model, and build an ownership mindset among employees. It provides steps for selecting and implementing an LTIP to share in a company's future value creation.
Cash or short-term incentive plans (STIP) engage employees in the process of achieving business objectives, reward desired behaviors, and help execute the organization’s long-term strategy. Incentive plans, when properly aligned to business outcomes and rolled-out effectively, can be a powerful tool that enable organizations to “do more with less” and achieve a greater return on investment (ROI) in cash compensation programs.
This document discusses various equity valuation models and concepts. It begins by explaining that common stock represents ownership in a company, with ownership implying control over the company through electing directors. It then discusses the dividend discount model for valuing stocks, including formulas for single-period, multi-period, and perpetual growth models. It also discusses using price multiples like P/E ratios and compares growth companies to growth stocks.
The document discusses various methods for valuing long-term securities such as bonds and stocks. It describes discounted cash flow models, which value assets based on the present value of expected future cash flows. For bonds, the models discount future coupon payments and maturity value. For stocks, models discount future dividends and terminal sale price. The dividend discount model and its constant growth variation are explained for valuing common stocks based on expected dividends.
Most business leaders believe that some portion of employee pay should be in the form of incentives, but are left struggling to find answers to key questions: How much of someone’s pay should be variable? And who should have incentive pay as part of their mix? How much of the incentive should be short-term and how much should be based on long-term performance? What type of incentive(s) should it be? What if I don’t pay incentives and just pay higher salaries than my competitors? Will that work just as well?
If these are questions you are facing, don’t miss this presentation!
The document discusses why now is the best time for companies to implement a phantom stock plan. It provides an overview of phantom stock plans, how they work, and their benefits compared to traditional equity plans. Specifically, phantom stock plans reward employees now for their contributions but pay out later, lowering current cash flow impacts. They also make the plans self-financing by tying payouts to productivity profits. The document aims to help businesses survive and thrive during uncertain economic times by balancing cash flow needs with employee incentives.
This document discusses dividend policy and the various theories around it. It defines dividends and discusses Walter's model and Gordon's model, which propose that dividend policy affects firm value. It also covers the irrelevance theories of Modigliani-Miller and the traditional approach, which argue that dividend policy does not impact value. The document provides formulas for the different models and discusses their assumptions and criticisms.
This document provides information on the Walter model and Gordon model for calculating the value of a company's shares based on dividend policy. The Walter model assumes a constant rate of return and cost of capital, and that retained earnings are the only source of financing. It provides a formula to calculate share price based on dividend payout, earnings per share, cost of capital and return on investment. The Gordon model similarly calculates share price based on dividend payout, earnings, retention ratio and cost of capital, assuming a constant growth rate. Several examples are provided applying these models to calculate optimal dividend payout and share valuation for different companies.
This document discusses various methods for valuing equity, including balance sheet methods, discounted cash flow methods, and relative valuation methods. Balance sheet methods include book value, liquidation value, and replacement cost. Discounted cash flow methods include dividend discount models like the single period, multi-period, zero growth, constant growth, two stage growth, and H models. It also discusses free cash flow models. Relative valuation methods include price to earnings ratios, price to book value ratios, and price to sales ratios. The document provides formulas for calculating some of these methods.
This document discusses the cost of capital and how to calculate it. It defines cost of capital as the rate of return a firm must earn on its investments to maintain its market value and attract funds. It then discusses how to calculate the costs of different sources of capital including long-term debt, preferred stock, common stock, and retained earnings. It explains how to calculate the weighted average cost of capital (WACC) and discusses weighting schemes. Finally, it discusses how to determine break points and calculate the weighted marginal cost of capital (WMCC), which can be used with the investment opportunities schedule to make financing decisions.
Phantom Stock : It is an employee benefit plan that gives the selected employees, many of the benefits of stock ownership without actually giving them any company stock. That’s why, also referred to as "Shadow Stocks." The employees are not allotted actual shares, but are issued Options with underlying shares in it, the value of which increases over a period of time and that can be converted into a predetermined cash amount, depending upon the terms of the Stock Option Plan, without any actual allotment of shares. The payment terms may depend upon tenure of employment, performance, appraisal criterion, meeting the targets etc., or any combination of them as well.
This document discusses different theories around the relevance and irrelevance of dividend policy decisions on firm valuation. It outlines the Walter and Gordon models which argue dividends are relevant, stating there is an optimal payout ratio depending on whether a firm's return on investment is greater than, less than, or equal to its cost of capital. It also describes the Modigliani-Miller model which argues dividends are irrelevant, assuming perfect capital markets. The document then discusses Gordon's modification incorporating risk aversion and the "bird in hand" preference for certain current dividends over uncertain future dividends.
1. The document discusses investment proposals by DHPL, a manufacturing company, to expand capacity and replace old machines.
2. It analyzes the proposals based on NPV calculations to determine if capacity expansion is profitable, the minimum cost savings needed to justify machine replacement, loan terms from SBI and a financial institution, and whether to borrow or lease equipment.
3. The analysis recommends DHPL expand capacity and borrow loans from the financial institution rather than SBI or lease equipment, as it represents the most cost effective financing option.
The document presents an alternative model for profit distribution on deposits in Islamic banks. Currently, banks use a weightage system that can negatively impact some depositors if weights are changed. The proposed model uses an income sharing ratio that distributes profits directly to the bank and depositors, avoiding losses to depositors if one ratio is adjusted. It provides an example showing that the alternative model maintains equitable profit distribution when seeking to increase one depositor's share.
Dividend policy
What is Dividend?
What is dividend policy?
Theories of Dividend Policy
Relevant Theory
Walter’s Model
Gordon’s Model
Irrelevant Theory
M-M’s Approach
Traditional Approach
Referred to:
Prasanna Chandra
Ch 19 share-based compensation and epsMarcusHuang6
This document discusses various types of stock-based compensation plans and how they are accounted for. It summarizes how restricted stock plans and stock option plans provide employees shares or options to purchase shares, and how the fair value of these awards is recorded as compensation expense over the vesting period. It also discusses how earnings per share is calculated, including the calculation of basic EPS using the weighted average shares outstanding and the calculation of diluted EPS which considers additional potential common shares from options, convertible securities, and contingently issuable shares.
Accounting "Oopsies" - Jennifer GoodmanDecosimoCPAs
This document discusses common accounting topics that can cause unintended errors, or "oopsies", including life insurance policies, compensated absences, stock compensation, legal fees, accruals, capitalization minimums, FOB shipping terms, and deferred tax calculations. It provides examples and guidance for properly accounting for each topic according to US GAAP. The expert, Jennifer Goodman, is available to answer questions on ensuring compliance and avoiding unintended accounting errors.
Example Memo Guest lecturer – Morgan Watson, Assurance Pa.docxcravennichole326
Example Memo:
Guest lecturer – Morgan Watson, Assurance Partner, Ernst & Young
Congratulations, you have just won the audit for the year ended December 31, 2012, for a new client,
ResearchPlus (the Company), which provides market research to companies through online surveys that
leverage the Company’s significant panel of members that take surveys and provide feedback on
potential products, services or advertising campaigns.
The Company has experienced significant growth over the past 10 years. Much of this growth was
funded by various rounds of equity funding from its private equity investors via preferred stock
issuances.
As is typical of a high-growth company, a significant portion of the compensation package that the
Company has provided to its key employees is options to purchase common stock. On June 30, 2012,
the Company issued 2 million options to its employees. The options have the following criteria:
• Vesting - 25% per year for four year
• Exercise price - $2.00/share (fair value of the common stock at the date of the grant)
• Estimated fair value of the options - $1.00
• Estimated forfeiture rate - 10%
Based on your review of the prior year financial statements, you note that the Company has applied
equity accounting for these options.
The Company is planning to file an Initial Public Offering document with the SEC in the next 6-12
months, and based on your experience you expect several questions from the SEC staff related to stock
compensation as it is common topic of comments from the staff.
During 2012, the Company raised $100 million of equity funding in exchange for issuing Series D
preferred stock to new investors. The Company utilized approximately $50 million to repurchase its
Series A preferred stock from its initial investors.
Prior to year-end, management approaches the audit team to discuss its plans to re-constitute its
repurchase of common stock from its employees as a reward for the successful equity raise utilizing $20
million of the proceeds as Management has agreed to allow employees to exercise their options and
then repurchase those shares of common stock.
Questions:
1. What is the proper accounting treatment for each of the following?
a. The stock options
b. The preferred stock
c. The treasury stock
2. What additional investigation should the audit team do into how the repurchase program has
operated in the past?
Example Answer (okay…:
Memorandum
To: Morgan Watson, CPA
CC: Dr. Calk, CPA
From: XXX, YYY, ZZZ, AAA, BBB
Date: 2/6/2019
Re: Case Study
Fact Pattern
The Company, a high growth corporation that is preparing to go public, had the following transactions and plans for
the year ended 2012:
On June 30, 2012 the company issued two million stock options to employees. The options will vest at a rate of 25%
a year, for four years. The exercise price was $2.00/share and the company estimated the value .
Many people consider executive compensation to be excessive, but is it really? The answer may lay in the eye of the beholder. A thought provoking discussion on the topic.
Cash or short-term incentive plans (STIP) engage employees in the process of achieving business objectives, reward desired behaviors, and help execute the organization’s long-term strategy. Incentive plans, when properly aligned to business outcomes and rolled-out effectively, can be a powerful tool that enable organizations to “do more with less” and achieve a greater return on investment (ROI) in cash compensation programs.
This document discusses various equity valuation models and concepts. It begins by explaining that common stock represents ownership in a company, with ownership implying control over the company through electing directors. It then discusses the dividend discount model for valuing stocks, including formulas for single-period, multi-period, and perpetual growth models. It also discusses using price multiples like P/E ratios and compares growth companies to growth stocks.
The document discusses various methods for valuing long-term securities such as bonds and stocks. It describes discounted cash flow models, which value assets based on the present value of expected future cash flows. For bonds, the models discount future coupon payments and maturity value. For stocks, models discount future dividends and terminal sale price. The dividend discount model and its constant growth variation are explained for valuing common stocks based on expected dividends.
Most business leaders believe that some portion of employee pay should be in the form of incentives, but are left struggling to find answers to key questions: How much of someone’s pay should be variable? And who should have incentive pay as part of their mix? How much of the incentive should be short-term and how much should be based on long-term performance? What type of incentive(s) should it be? What if I don’t pay incentives and just pay higher salaries than my competitors? Will that work just as well?
If these are questions you are facing, don’t miss this presentation!
The document discusses why now is the best time for companies to implement a phantom stock plan. It provides an overview of phantom stock plans, how they work, and their benefits compared to traditional equity plans. Specifically, phantom stock plans reward employees now for their contributions but pay out later, lowering current cash flow impacts. They also make the plans self-financing by tying payouts to productivity profits. The document aims to help businesses survive and thrive during uncertain economic times by balancing cash flow needs with employee incentives.
This document discusses dividend policy and the various theories around it. It defines dividends and discusses Walter's model and Gordon's model, which propose that dividend policy affects firm value. It also covers the irrelevance theories of Modigliani-Miller and the traditional approach, which argue that dividend policy does not impact value. The document provides formulas for the different models and discusses their assumptions and criticisms.
This document provides information on the Walter model and Gordon model for calculating the value of a company's shares based on dividend policy. The Walter model assumes a constant rate of return and cost of capital, and that retained earnings are the only source of financing. It provides a formula to calculate share price based on dividend payout, earnings per share, cost of capital and return on investment. The Gordon model similarly calculates share price based on dividend payout, earnings, retention ratio and cost of capital, assuming a constant growth rate. Several examples are provided applying these models to calculate optimal dividend payout and share valuation for different companies.
This document discusses various methods for valuing equity, including balance sheet methods, discounted cash flow methods, and relative valuation methods. Balance sheet methods include book value, liquidation value, and replacement cost. Discounted cash flow methods include dividend discount models like the single period, multi-period, zero growth, constant growth, two stage growth, and H models. It also discusses free cash flow models. Relative valuation methods include price to earnings ratios, price to book value ratios, and price to sales ratios. The document provides formulas for calculating some of these methods.
This document discusses the cost of capital and how to calculate it. It defines cost of capital as the rate of return a firm must earn on its investments to maintain its market value and attract funds. It then discusses how to calculate the costs of different sources of capital including long-term debt, preferred stock, common stock, and retained earnings. It explains how to calculate the weighted average cost of capital (WACC) and discusses weighting schemes. Finally, it discusses how to determine break points and calculate the weighted marginal cost of capital (WMCC), which can be used with the investment opportunities schedule to make financing decisions.
Phantom Stock : It is an employee benefit plan that gives the selected employees, many of the benefits of stock ownership without actually giving them any company stock. That’s why, also referred to as "Shadow Stocks." The employees are not allotted actual shares, but are issued Options with underlying shares in it, the value of which increases over a period of time and that can be converted into a predetermined cash amount, depending upon the terms of the Stock Option Plan, without any actual allotment of shares. The payment terms may depend upon tenure of employment, performance, appraisal criterion, meeting the targets etc., or any combination of them as well.
This document discusses different theories around the relevance and irrelevance of dividend policy decisions on firm valuation. It outlines the Walter and Gordon models which argue dividends are relevant, stating there is an optimal payout ratio depending on whether a firm's return on investment is greater than, less than, or equal to its cost of capital. It also describes the Modigliani-Miller model which argues dividends are irrelevant, assuming perfect capital markets. The document then discusses Gordon's modification incorporating risk aversion and the "bird in hand" preference for certain current dividends over uncertain future dividends.
1. The document discusses investment proposals by DHPL, a manufacturing company, to expand capacity and replace old machines.
2. It analyzes the proposals based on NPV calculations to determine if capacity expansion is profitable, the minimum cost savings needed to justify machine replacement, loan terms from SBI and a financial institution, and whether to borrow or lease equipment.
3. The analysis recommends DHPL expand capacity and borrow loans from the financial institution rather than SBI or lease equipment, as it represents the most cost effective financing option.
The document presents an alternative model for profit distribution on deposits in Islamic banks. Currently, banks use a weightage system that can negatively impact some depositors if weights are changed. The proposed model uses an income sharing ratio that distributes profits directly to the bank and depositors, avoiding losses to depositors if one ratio is adjusted. It provides an example showing that the alternative model maintains equitable profit distribution when seeking to increase one depositor's share.
Dividend policy
What is Dividend?
What is dividend policy?
Theories of Dividend Policy
Relevant Theory
Walter’s Model
Gordon’s Model
Irrelevant Theory
M-M’s Approach
Traditional Approach
Referred to:
Prasanna Chandra
Ch 19 share-based compensation and epsMarcusHuang6
This document discusses various types of stock-based compensation plans and how they are accounted for. It summarizes how restricted stock plans and stock option plans provide employees shares or options to purchase shares, and how the fair value of these awards is recorded as compensation expense over the vesting period. It also discusses how earnings per share is calculated, including the calculation of basic EPS using the weighted average shares outstanding and the calculation of diluted EPS which considers additional potential common shares from options, convertible securities, and contingently issuable shares.
Accounting "Oopsies" - Jennifer GoodmanDecosimoCPAs
This document discusses common accounting topics that can cause unintended errors, or "oopsies", including life insurance policies, compensated absences, stock compensation, legal fees, accruals, capitalization minimums, FOB shipping terms, and deferred tax calculations. It provides examples and guidance for properly accounting for each topic according to US GAAP. The expert, Jennifer Goodman, is available to answer questions on ensuring compliance and avoiding unintended accounting errors.
Example Memo Guest lecturer – Morgan Watson, Assurance Pa.docxcravennichole326
Example Memo:
Guest lecturer – Morgan Watson, Assurance Partner, Ernst & Young
Congratulations, you have just won the audit for the year ended December 31, 2012, for a new client,
ResearchPlus (the Company), which provides market research to companies through online surveys that
leverage the Company’s significant panel of members that take surveys and provide feedback on
potential products, services or advertising campaigns.
The Company has experienced significant growth over the past 10 years. Much of this growth was
funded by various rounds of equity funding from its private equity investors via preferred stock
issuances.
As is typical of a high-growth company, a significant portion of the compensation package that the
Company has provided to its key employees is options to purchase common stock. On June 30, 2012,
the Company issued 2 million options to its employees. The options have the following criteria:
• Vesting - 25% per year for four year
• Exercise price - $2.00/share (fair value of the common stock at the date of the grant)
• Estimated fair value of the options - $1.00
• Estimated forfeiture rate - 10%
Based on your review of the prior year financial statements, you note that the Company has applied
equity accounting for these options.
The Company is planning to file an Initial Public Offering document with the SEC in the next 6-12
months, and based on your experience you expect several questions from the SEC staff related to stock
compensation as it is common topic of comments from the staff.
During 2012, the Company raised $100 million of equity funding in exchange for issuing Series D
preferred stock to new investors. The Company utilized approximately $50 million to repurchase its
Series A preferred stock from its initial investors.
Prior to year-end, management approaches the audit team to discuss its plans to re-constitute its
repurchase of common stock from its employees as a reward for the successful equity raise utilizing $20
million of the proceeds as Management has agreed to allow employees to exercise their options and
then repurchase those shares of common stock.
Questions:
1. What is the proper accounting treatment for each of the following?
a. The stock options
b. The preferred stock
c. The treasury stock
2. What additional investigation should the audit team do into how the repurchase program has
operated in the past?
Example Answer (okay…:
Memorandum
To: Morgan Watson, CPA
CC: Dr. Calk, CPA
From: XXX, YYY, ZZZ, AAA, BBB
Date: 2/6/2019
Re: Case Study
Fact Pattern
The Company, a high growth corporation that is preparing to go public, had the following transactions and plans for
the year ended 2012:
On June 30, 2012 the company issued two million stock options to employees. The options will vest at a rate of 25%
a year, for four years. The exercise price was $2.00/share and the company estimated the value .
Many people consider executive compensation to be excessive, but is it really? The answer may lay in the eye of the beholder. A thought provoking discussion on the topic.
A course for advanced students who want to understand how options really work
John Olagues
www.truthinoptions.net
olagues@gmail.com
504-875-4825
http://www.wiley.com/WileyCDA/WileyTitle/productCd-0470471921.html
1. The document defines employee stock options (ESOPs), employee stock purchase plans (ESPPs), and stock appreciation rights (SARs) as different types of share-based payment plans used to compensate employees.
2. It provides details on the taxation of ESOPs/ESPPs for employees and companies, including that employees pay tax on the difference between fair market value and exercise price as a perquisite, and may pay capital gains tax if shares are sold.
3. For SARs, the document explains that cash-settled SARs are taxed as salary for employees, while equity-settled SARs are taxed as perquisites for employees and the company may claim a deduction.
The document discusses several economic principles:
1) The opportunity cost principle states that managerial decisions should maximize benefits by choosing alternatives that forgo the least valuable options.
2) The incremental concept involves estimating how decision alternatives impact costs and revenues, and emphasizing changes in total costs and revenues.
3) The equi-marginal principle suggests allocating resources between options so that the marginal productivity gains from each activity are equal, maximizing overall profits.
Principles of economics | Fundamental of EconomicsSachin Paurush
This document discusses several economic principles:
1) The opportunity cost principle states that managerial decisions should maximize benefits by choosing alternatives that forgo the least value from other options.
2) The incremental concept involves estimating how decision alternatives impact costs and revenues, and emphasizing changes in total costs and revenues.
3) The discounting principle accounts for the time value of money by adjusting future values based on interest rates to determine their present value.
4) The equi-marginal principle suggests allocating limited resources between options to equalize the marginal productivity gains from each activity.
Reducing risks of holding Employee Stock OptionsTruth in Options
Reducing the risks of holding Employee Stock Options can only be done efficiently by selling calls and buying puts.
Most advisers claim otherwise. They do so because their employers and the companies benefit from doing so, at the expense of their clients. Its a violation of their fiduciary duties to advise early exercises, sell and diversify.
Fundamental concepts, principle of economicsShompa Nandi
Fundamental Concept or Principle of Economics, Opportunity cost principle, Equi-marginal principle, incremental principle, discounting principle, Risk and uncertainty, Time Perspective
WACC ExampleA firm is considering a new project which would b.docxmelbruce90096
WACC Example:
A firm is considering a new project which would be similar in terms of risk to its existing projects. The firm needs a discount rate for evaluation purposes. The firm has enough cash on hand to provide the necessary equity financing for the project. Also, the firm:
· has 1,000,000 common shares outstanding
· current price $11.25 per share
· next year’s dividend expected to be $1 per share
· firm estimates dividends will grow at 5% per year after that
· flotation costs for new shares would be $0.10 per share
· has 150,000 preferred shares outstanding
· current price is $9.50 per share
· dividend is $0.95 per share
· if new preferred are issued, they must be sold at 5% less than the current market price (to ensure they sell) and involve direct flotation costs of $0.25 per share
· has a total of $10,000,000 (par value) in debt outstanding. The debt is in the form of bonds with 10 years left to maturity. They pay annual coupons at a coupon rate of 11.3%. Currently, the bonds sell at 106% of par value. Flotation costs for new bonds would equal 6% of par value.
The firm’s tax rate is 40%. What is the appropriate discount rate for the new project?
Solution
:
Market value of common = 11.25(1000000) =
$11,250,000
Market value of preferred = 9.50(150000) =
$1,425,000
Market value of debt = 10000000(1.06) =
$10,600,000
Total value of firm =
$23,275,000
Cost of common:
(Note: floatation costs ignored for common equity because cash on hand is enough to finance the project.)
1389
.
0
05
.
0
25
.
11
1
g
P
Div
r
1
=
+
=
+
=
Cost of preferred:
1083
.
0
25
.
0
)
05
.
0
1
(
50
.
9
95
.
0
P
net
Div
r
=
-
-
=
=
Cost of debt:
Net price = 106% - 6% = 100% of par value
Net price = par
Therefore, cost of debt = coupon rate
r = 11.3%
Therefore:
(
)
(
)
(
)
(
)
%
46
.
10
1046
.
0
4
.
0
1
113
.
0
23275000
10600000
1083
.
0
23275000
1425000
1389
.
0
23275000
11250000
WACC
=
=
-
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+
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Corporate Finance
Objectives of the Course
On successful completion of this course, you should be able to:
Identify the purpose and relevance of Corporate Finance;
Explain the use of a variety of advance capital budgeting techniques;
Discuss the importance of risk and return in Corporate Finance;
Discuss the process determining the capital structure and dividend policy;
Apply financial derivatives in risk management; and
Discuss factors that affect shareholders’ wealth.
Topic 1: Value and Capital Budgeting
Net Present Value
How to Value Bonds and Stocks
Some Alternative Investment Rules
Net Present Value and Capital Budgeting
Risk Analysis, Options and Capital Budgeting
Topic 2: Risk and Return
Capital Market Theory: An Overview
Return & Risk: The Capital Asset Pricing Model (CAPM)
An Alternate View of Risk and Return: The Arbitrage Pricing Theory
Risk, Cost of Capital, and Capital.
Profit sharing refers to incentive plans that provide employees payments in addition to regular pay that depend on company profitability. In public companies, these plans typically allocate company shares to employees. The basis for profit sharing is performance and job level. Any non-salary compensation like benefits are considered part of the 50% profit share for employees and not operating expenses. When companies incur losses, those losses can be paid from future years' profit shares up to 50%.
Discuss bankrupcity, reorganization, and liquidationDina Erliana
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1) A firm's capital structure refers to the mix of debt and equity used to finance its operations and assets. The optimal structure balances the lower cost of debt against the greater risks to equity holders.
2) Firms can issue more debt or equity to change their structure. Issuing debt and repurchasing equity increases debt and lowers equity on the balance sheet.
3) Mergers and acquisitions can also significantly change the capital structures of combining firms, depending on whether the deal uses cash, shares, or leaves existing debt in place.
This document discusses various investment rules used in capital budgeting decisions, including the net present value (NPV) rule and alternative rules. It provides the following key points:
- The preferred rule is NPV, which accepts projects with positive NPV and rejects those with negative NPV.
- Common alternative rules include payback period, accounting rate of return, internal rate of return, and profitability index. These rules are easier to calculate but have limitations.
- A survey found that three-quarters of companies use IRR and nearly three-quarters use NPV when evaluating projects. Payback period and accounting rate of return are also commonly used.
- Alternative rules can be biased against long-
The document provides an overview of cost of capital concepts including the components of cost of capital (debt, preferred stock, common equity), weighted average cost of capital (WACC), and factors that affect the WACC. It then discusses various methods for calculating the cost of different capital components, including the cost of debt, cost of preferred stock, and cost of common equity using the capital asset pricing model (CAPM), dividend capitalization model, and own-bond-yield-plus-risk-premium method. Examples are provided to illustrate how to apply these methods to determine the weighted average cost of capital for a company.
AHP can create potential value by leveraging its capital structure through increasing debt levels. The weighted average cost of capital decreases as debt increases, which would increase the company's valuation. While debt offers tax benefits, it also increases bankruptcy risk. AHP could implement a more aggressive strategy by issuing bonds and using the proceeds to invest in new machinery, R&D, or acquisitions to increase future cash flows. This strategy aligns with AHP's low-cost culture and focus on long-term shareholder value.
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The document discusses the cost of capital and various methods for calculating it. It defines cost of capital as the required return on funds provided by creditors and shareholders. It then covers the cost of debt, cost of equity using the dividend growth model and CAPM, weighted average cost of capital (WACC), weighted average cost of equity (WACE), and differences between cost of equity and cost of debt. The cost of capital is important for investment decisions, capital structure, performance evaluation, and dividend policy.
This document discusses several methods for human resource accounting, including historical cost, replacement cost, opportunity cost, the Lev & Schwartz model, the Eric Flamholtz model, goodwill methods, Cascio's approach, and the Jaggi Lau model. It also discusses calculating the costs of turnover and absenteeism. Several limitations are provided for each method. Examples are given to demonstrate calculating human resource value and salaries using competitive bidding between divisions based on expected profits from engineers.
Similar to New Dynamic Employee Stock Options Presentati (4) (20)
1. .
Dynamic Employee Stock Options
A New Design for Employee Stock Options
John Olagues
olagues@gmail.com
504-428-9912
www.optionsforemployees.com
2. "Options were poorly structured, and, consequently, they
failed to properly align the long-term interests of
shareholders and managers, the paradigm so essential for
effective corporate governance. The incentives they created
overcame the good judgment of too many corporate
managers.”
Alan Greenspan
3. The topic of this presentation is most relevant today as there are
structural problems with the traditional employee stock options.
Traditional options by their nature prevent effective long term alliances
between employees and shareholders largely because of the risk-
averse attitudes of the employees and their interest in reducing that
risk.
Unless the employees, managers or executives are willing to use
hedging strategies involving selling exchange traded calls or buying
exchange traded puts on company stock, their only choice to reduce
risk is by early exercises and sell stock, and perhaps diversify the net
after tax proceeds.
This strategy of making early exercises is so highly penalized in most
cases of traditional ESOs that its unwise in all but rare cases to use the
strategy. In fact, if unsophisticated employees are persuaded by wealth
managers to use such a strategy, the employees should consider a lawsuit
under SEC Rule 10 b-5
4. Is there a way to design employee stock options to make
them more effective in accomplishing the goals for which
they were created?
Before we can answer that question, we must state the goals.
The goals are to
A. Align the interests of the managers, officers and directors with the
interests of the shareholders by making the value of their equity
compensation dependent on an increase in value of the company
shares.
B. Attract and Influence high quality employees to be loyal long term
employees.
5. C. Preserve and increase the cash position of the company.
D. Encourage early cash flows to the company from the early payment of
the exercise price and the tax credits upon exercises.
E. Allow for the efficient management of the granted options by the
grantees.
F. Maintain the theoretical costs of the plans to a modest level.
6. How well do Traditional ESOs accomplish those goals ?
A. The traditional ESOs do align the employee/executive with
shareholders during the vesting periods and after vesting as long as
the employee/executive holds the ESOs and the grantees understand
the values and risks of the ESOs.
B. Company cash is preserved and indeed additional cash flows are
generated by any early exercises (which are encouraged by the
company and the options holders' advisers through their promotion of
the premature exercise, sell stock and diversify strategy).
7. C. The traditional ESOs because of vesting requirements, non-
transferability and non-pledgability make it difficult for risk-adverse
grantees to efficiently manage traditional ESO positions. Premature
exercises after vesting require penalties to the grantees in the form of
a) a forfeiture of the remaining "time value" which is quite high when
volatility is reasonably high and b) an early payment of taxes.
D. Early exercises, usually followed by sales of stock cause an early
termination of 100% of the grantee/shareholders alignment and long
term incentives from those options.
E. Theoretical expenses against earnings are moderate, given the
restrictions, although "fair values" on the grant day are often
understated by the company.
8. What are Dynamic Employee Stock Options?
Dynamic Employee Stock Options are Options whereby the
settlement of the exercises consist of the purchase of less than 100%
of stock (perhaps 75%) plus payments in the form of new ESOs with
new 10 year maximum expiration and current market prices as the
exercise prices.
The exact value and number of new ESOs is determined by a formula
which includes a percentage (perhaps 25%) of the full intrinsic value
of the options upon exercise plus the recovery of the otherwise
forfeited remaining "time value" in 100% of the options. Exercising
Dynamic ESOs results in the "fair value" of the resulting combination
of stock and options being equal to the "fair value" prior to the
exercise. However, the exercise will cause a tax liability on 75% the
intrinsic value of the options. No "time value" is forfeited although a
partial penalty for an early tax payment is incurred.
The following ESO plan goals are enhanced(see next slide).
9. A. A substantial alignment of interests is extended past the exercise
and sale of stock as the grantee still will hold substantial new ESOs.
B. Company cash is preserved and earlier cash flows will come to the
company since the employee will likely exercise earlier. The two
penalties of early exercises (i.e. forfeiture of "time value" and an early
tax payment) by the grantee are substantially eliminated. The grantee,
therefore will likely exercise much earlier causing more and earlier
cash flows to the company.
C. Efficient risk management of the grants by the grantee is facilitated
since most of the penalties of early exercises of traditional ESOs
are eliminated. The stock can be sold and hedging will not be
necessary.
D. The theoretical costs to the company of the Dynamic ESOs are
about 3.5% greater than traditional ESOs.
10. The terms of the settlement of the exercise could be
the following.
For example: Upon exercise, grantee receives 75% (rather than 100%)
of the stock at the exercise price plus new ESOs with new 10 year
expiration dates and market value exercise prices.
The "fair value" of the new ESOs would equal the sum of a) + b):
a) 25% of the "intrinsic value" of the exercised ESOs that would have
been gained on a traditional ESO exercise, plus
b) the amount of the remaining "time value" otherwise forfeited to the
company upon early exercise of 100% of the employee stock options.
11. The receipt of 75% of the stock could be changed by the
company to receipt of 60% or 80% of the stock at the exercise
price, which will change the 25% of new options to 40% or
20%.
The grantee would receive, in total, new options equal to 40%,
25%, or 20% of the full "intrinsic value" plus the return of the
otherwise forfeited "time value" in new options.
The plan could give the choices of the percentages of stock
received to the grantee or pre-determined by the company.
12. The following two slides are familiar graphs. They illustrate among
other things, the value of the "time premiums" (i.e. time value) and
"intrinsic values" and how they change with different volatilities and
different prices of the stock at different times.
The slides also show the net take home amounts after tax for
traditional ESOs exercised, assuming a total tax of 40%.
The companies will take the "intrinsic value" as a tax deduction upon
the exercise.
Dynamic ESOs will have different results. The grantee gets less
stock upon exercise than with the TESOs but the grantee gets a new
load of new DESOs. The tax deduction to the company will be
reduced.
13.
14.
15. Let us assume that the 1000 vested ESOs in the slides were Dynamic
ESOs with a 75/25 split upon exercise with the stock at various prices
and various times remaining.
First we use the .30 volatility graphs
A. Employee exercises when the stock is trading at $30 with 5.5 years
expected time to expiration. The results are: the employee receives
750 shares for a purchase price of $20 and receives new ESOs with
an exercise price of $30 with 10 years to expiration. The new ESOs
have a value of $2500 from 25% of the "intrinsic value" plus $6114 of
"time value" = $8614.
He would receive 720 new ESOs, which are valued at $8614. The "fair
value" of the package upon exercise, that the employee receives is
$7500 in intrinsic value + $8614 in new options value. Which equals
the exact value the employee had prior to exercise.
16. B. If the employee waited until the stock increased to $50 to exercise
and there were 3.5 expected years to expiration, he would again
receive 750 shares at $20 and new DESOs as follows. The new
options value is $7500 (i.e. $30 x 2500) plus $3368 of "time value" =
$10,868, giving 530 new ESOs with an exercise price of $50 with 10
years maximum life.
The full value that the employee receives is $22,500 in "intrinsic
value" plus $10,868 in new ESOs, which equals exactly the value
prior to exercise ($33,368).
17. If the assumptions in the block of the second graph (slide 14) where a
.60 volatility was used, then the "fair value" after exercise would be the
same as the "fair value" prior to exercise, which are greater than the
"fair values" when we assumed the .30 volatility.
For example. Assume that the stock was trading at $40 with a .60
volatility when the DESOs were exercised and the split was 75/25.
The grantee would receive 750 shares purchased at $20, plus new
options with an exercise price of $40 with 10 years maximum life and
6.3 years expected life. The grantees value is $15,000 in receiving
750 shares 20 points below market, plus $5000 in new options value,
plus the "time value" of $6460 returned in the form of new options.
The total is $26,464 in value. The $11,460 would equal 521 new
options.
The only penalty for early exercise is that there is an early tax required
on the "intrinsic value" (i.e. $15,000) received in stock.
18. Exercise of Vested 1,000 DESOs with 75/25 Split
1 2 3 4 5 6 7 8 9
Stock ….Ex ..…Vol.....Expected...Time value...25% of…Colum….Total New...Tot. Intr. Val.
Price….Price…….......Time to exp...Remain...Intrin.Val… 5+6 ….Option. Rec..of Stock Rec.
-----------------------------------------------------------------------------------------------
$30.….. $20…....30…....5.5 years……$6114..…$2500......$8614….....700...........$7500
$40…....$20…....30……4.5 years…….$4526…..$5000…..$9526….….580.........$15,000
$50…….$20……30……3.5 years…….$3368…..$7500....$10,868 …...530.........$22,500
$60…….$20……30……2.5 years…….$2372…$10,000…$12,372……503.........$30,000
$30. …..$20…....60...…5.3 years…….$9300…..$2500….$11,800……715...........$7500
$40.…...$20…....60……4.3 years…….$6460…..$5000….$11,464……521.........$15,000
$50...….$20…….60……3.3 years…....$4740…..$7500….$12,240……445.........$22,500
$60...….$20…....60……2.3 years…….$2670....$10,000…$12,670…...384.........$30,000
The options with a .30 volatility assume an interest rate of 5%
The options with a .60 volatility assume an interest rate of 3%
The amount of stock received upon exercise is 750 shares for a cost of $20 per share.
All new ESOs have an exercise price equal to the market price and 10 years maximum life.
Column 7 equals the total value of the new ESOs in each case. Column 9 shows the amount before tax
19. A fuller explanation of
Dynamic Employee Stock Options
can be found at the following link
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https://docs.google.com/document/d/1wGrmquhWBKzRhVtP4RdbG5Yl6VcSW1aalDmt5vnKvE4/edit?
authkey=CPWK1-kN&hl=en_US&authkey=CPWK1-kN