Third Exam Theory Questions Flashcards
All else equal, a reduction in the volatility of the stock would cause the fair value of the stock options and the related expenses to…
Decrease
All else equal, an increase in the expected life of the option would cause the fair value of the option to…
Increase
A company is considering reducing the vesting period for its stock option awards in January 2025 from three years to two years. It still expects employees to exercise thier options after 5 years (no change in expected life). The effect of this change would be…
There is no change in the fair value of each option, but the 2025 stock option expense increases.
Both stock options and restricted stock awards are recognized as compensation expense over thier vesting periods. The expected life of options is an input in the calculation of thier value but the vesting period is not.
So, if the fair value of the options is $42k consistantly each year and you change the vesting period from 3 years to 2 you would recognize $21K in expense instead of $14k.
In 2014, Yahoo’s investment in Alibaba increased from $1 billion to $39.9 billion. Yahoo recorded this change in “Other Comprehensive Income”. What do the current rules say about this?
It would be part of net income under current rules. (Beginning Dec. 15, 2017)
The traditional DuPont ROE breakdown includes a leverage ratio. Assumint that noncontrolling interests are subtracted from assets, would Coca-Cola’s leverage ration after consolidating the equity method investments be higher or lower than the original financial statements?
Original Assets Net of NCI: 85,311
Consolidated Assets Net of NCI: 138,957
Equity: 19,299
Original: 85,311/19,299 = 4.42
Consolidated: 138,957/19299 = 7.2
The leverage ratio in the traditional DuPont ROE breakdown increases when the equity method investments are consolidated because of the bottling companies’ high net asset levels compared to Coca-Cola
Assume current operating liabilities are for Accounts Payable. Does the change in current operating liabilities increase or reduce operating cash flows in Year 1 relative to net income?
The increase in current liabilities increases Operating Cash Flow above net income because the company conserves its cash by delaying payments to suppliers (so accounts payable increases).
Does the change in current operating assets increase or reduce operating cash flows in Year 1 relative to net income?
The increase in current assets reduces Operating Cash Flow below net income because some sales revenues are not collected (so accounts receivable increase) or cash is spent to increase inventories.
What are net payments to/from creditors in Year 1?
Y0 Net Debt = 60
Y1 Net Debt = 73.15
After Tax Interest Payment = 2.4
73.15-60 = 13.15 - 2.4 = 10.75 net receipts
