Stock Analysis: Book Value, Options, and Compensation

2. Previous Lecture Summary • Analysis for the Investor • Price/Earnings Ratios, • Percentage of Retained Earnings, • Dividend-Payout, • Dividend Yield, • Rights, • Options, • Warrants • Practical Exercises

3. Today's Lecture Topics • Analysis for the Investor • Book value per share, • Stock Options • Restricted Stock • Stock Appreciation Rights • Practical Exercises

4. Book Value per Share • An accounting term that measures the intrinsic value of a single share of a company’s stock. • Book value is calculated by totalling the company’s assets, subtracting all debts, liabilities, and the liquidation price of preferred stock, then dividing the result by the number of outstanding shares of common stock. • Preferred equity should be measured at liquidation value, if available • Market value vis-à-vis book value • Book value reflects past unrecovered asset costs • Market value reflects the potential of the firm

5. Stock Options • A program within a company whereby employees are allowed to buy a specific number of stock options in the company for a specified amount of time. • The options usually have an exercise price equal to the market price at the time the options were given. • Stock option fair value • Expensing is required per SFAS 123R • Allocate option fair value to the service period • Date of grant through vesting date • Non compensatory plans • Encourage widespread ownership by employees • Slight discount from fair value • No compensation expense is recognized

6. Impact of Stock Option Expense

7. Restricted Stock • Shares of stock given to an employee with certain stipulations that limit the employee's rights regarding the shares until he or she has been employed by the company for a certain amount of time. • Employees possessing restricted stock may also be awarded certain rights associated with the shares, such as dividend payments and voting rights, but it may take several years for an employee to be granted all the rights provided to stockholders.

8. Restricted Stock • Sometimes offered to employees in lieu of stock option plans • Restrictions • Employee cannot sell stock for a specified period of time. • Employee may forfeit the shares if they leave employer • Awards may be linked to financial goals

9. Stock Appreciation Rights • Employee receives compensation in cash or stock • Difference between option price and market price • Expense is a function of market price • Year-end spread is measured • Current expense is spread minus prior recognition

10. Stock-Based Compensation • May be awarded through the use of • Stock options • Restricted stock • Stock appreciation rights • Firms vary in their use of these methods of granting stock-based compensation • Select a single method • Use two of the three methods • Use all three in combination

11. Practical Exercise According to the financial statements for Samson Electronics, Inc., the firm has total assets valued at $220 million. It also has total liabilities of $140 million. Company records indicate that the firm has issued 2 million shares of stock. a. Based on the above information, calculate the book value for a share of Samson Electronics. b. If a share of Samson Electronics, Inc. currently has a market value of $50 a share, what is the market-to-book ratio?

13. Practical Exercise For four years, Mary Nations invested $4,000 each year in America Bank stock. The stock was selling for $34 in 2007, for $48 in 2008, for $37 in 2009, and $52 in 2010. a. What is Ms. Nation’s total investment in America Bank? b. After four years, how many shares does Ms. Nations own? c. What is the average cost per share of Ms. Nation’s investment?

15. Practical Exercise Calculating Earnings Per Share, Price-Earnings Ratio, and Book Value. As a stockholder in Bozo Oil Company, you receive its annual report. In the financial statements, the firm has reported assets of $9 million, liabilities of $5 million, after-tax earnings of $2 million, and 750,000 outstanding shares of common stock. a. Calculate the earnings per share of Bozo Oil’s common stock. b. Assuming that a share of Bozo Oil’s common stock has a market value of $40, what is the firm’s price-earnings ratio? c. Calculate the book value of a share of Bozo Oil’s common stock.

17. Practical Exercise • The following information was in the annual report of XYZ Company • 2003 2002 2001 • Earnings per share $1.12 $1.20 $1.27 • Cash dividend per share • (Common) $.90 $.85 $.82 • Market price per share $12.80 $14.00 $16.30 • Total common dividends $21,700,000 $19,500,000 $18,360,000 • Shares outstanding end • of year 24,280,000 3,100,000 22,500,000 • Total assets $1,280,100,000 $1,267,200,000 $1,260,400,000 • Total liabilities $ 800,400,000 $ 808,500,000 $ 799,200,000 • Nonredeemable • Preferred stock $ 15,300,000 $ 15,300,000 $ 15,300,000 • Preferred dividends $ 910,000 $ 910,000 $ 910,000 • Net income $ 31,200,000 $ 30,600,000 $ 29,800,000 • Required: • Compute the following for 2003,2002,2001: • Book Value per share

20. Practical Exercise • ABC is primarily engaged in the worldwide production, processing, distribution, and marketing of food products. The following information is extracted from its 2003 annual report: • 2003 2002 • Earnings per share $1.08 $ 1.14 • Cash dividends per common share $ .80 $ .76 • Marketing price per common share $12.94 $15.19 • Common shares outstanding 25,380,000 25,316,000 • Total assets $1,264,086,000 $1,173,924,000 • Total liabilities $ 823,758,000 $ 742,499,000 • Nonredeemable • preferred stock $ 16,600,000 $ 16,600,000 • Preferred dividends $ 4,567,000 $ 930,000 • Net Income $ 32,094,000 $ 31,049,000 • Required: • Based on these data, compute the following for 2003 and 2002 • Book Value per share

22. Practical Exercise Jazzy Juniors, a retail clothing manufacturer, reported the following profit figures in its 2010 annual report.

23. Practical Exercise (Cont’d) Required:

25. Lecture Summary • Analysis for the Investor • Book value per share, • Stock Options • Restricted Stock • Stock appreciation rights • Practical Exercise