ACCT 3020 SHE Exam

 List and briefly describe at least 4 reasons why a company may purchase treasury shares

Fight off unfriendly takeover attempt

Meet employee stock compensation contract

Meet proposed merger agreement

Meet stock dividend requirement

Reduce shareholder pressure for paying/increasing dividend

Increase EPS by reducing # of shares

Impact the market price of stock – to stabilize

Discuss how are stock options & stock appreciation rights are similar and differ? 

Similar

Ways to compensate employees

Compensation based on stock price

Both have year-end JE to recognize comp exp

Dissimilar

Stock options have a JE on grant date; SAR does not

Stock options require employee action to buy shares; SAR does not

Stock options increase assets through cash; SAR decrease assets through cash

List the 3 dividend dates

Declaration date, date of record, date of payment

List the 3 dividend prerequisites for paying a cash dividend

Board takes formal action to declare; Sufficient cash; Sufficient RE

Equity shift

any transaction impacting only SHE accounts; the total SHE $ amount does not change but the account balances change

Ex-Dividend

Stock that is bought in-between the date of record and the date of payment; buyer is not entitled to the dividend

Compensatory Stock Option

A select group of employees who have the right to buy shares at a set price at a future point in time for future service; designed to be a form of compensation for their services based on stock price performance

Convertible PS

A right that PS shareholder has allowing them to convert their PS to CS shares

Additional Paid-In Capital TS

Account created under the Treasury stock cost method only when shares are re-issued at a price above the re-acquisition price to the firm

Greenmail

a term used to describe when a firm is compelled to buy back their shares as a defense strategy against a takeover attempt

Excess Dividend

The dividends beyond the typical dividend that impacts PS shareholders with Participating rights that allows the and additional portion of dividends above their predetermined amount

Quasi reorganization

a process by which a firm that has net losses that have exceeded net incomes (a deficit in RE) that allows the firm to restructure without going through bankruptcy; the process is designed to reset RE back to a zero balance for the “new start”

Redeemable PS

Co has the right to buy back PS; a “pseudo-debt” financing strategy. These look more like debt than equity and are required to be reported in liabilities.

Participating PS

A right granted to PS shareholders that allows them to receive additional dividends in a time period when the firm pays an excess dividend

Watered stock

Shares of stock sold at a price below par value; deemed illegal

Reverse Stock Split

When a firm calls back existing shares and reissues fewer shares as an attempt to increase stock price; typically when the firm is in danger of de-listing

Dividend in arrears

When PS has cumulative rights and the firm has not declared and paid a past dividend. PS shareholders have the right to receive these first in the next period when dividends are declared and paid.

Non- compensatory stock option

A right to buy stock at a reduced price available for any full time employees, must be equal rights across all employee levels with the same discount rate, expiration in a short time period, and purchase price is based on current stock price

List the 4 possible steps in a quasi-reorganization (in proper sequential order)

1. Revalue Assets to FV (up or down); difference to RE

2. Revalue Liabilities to FV (up or down); difference to RE

3. Use APIC; Difference to RE

4. Use CS Balance; difference to RE

When might a firm only need to use steps 1 and 2 of quasi reorganization?

when the revaluation of assets and liabilities is enough to reset RE back to zero, covering the entire amount of the original deficit balance

List and describe how a firm determines if a stock option was non-compensatory

Options are offered at a reduced price available for any full time employees, must be equal rights across all employee levels with the same discount rate, expiration in a short time period, and purchase price is based on current stock price

List at least 3 ways in which debt and equity are similar?

Both are sources of financing (raise capital); both investor groups expect a return on their investments; both involve risk

List at least 5 ways in which debt and equity are different?

Debt – firm borrowed $; Equity -firm received investment $

Debt – interest is the return and tax deductible to firm; Equity – return could be in dividends and no tax deduction to the firm and also stock price increase

Debt – no ownership, no vote; Equity – ownership, vote

Debt – required payments; Equity – no required payments

Debt – legally protected; Equity – no true legal protection

Debt – lesser risk;  Equity- higher risk