Decrease earnings per share

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Reference no: EM133209393

Question 1.

A proponent of ESOs argues that no expense should be recorded for ESOs issued to managers and other employees, since ESOs do not cost the employer anything. On the contrary the employer receives cash equal to the ESOs' exercise price.

Do you agree that no expense should be recorded? Explain why or why not.

Question 2.

Young and Yang(2011) examined managers' stock repurchase decisions, under which firms buy back outstanding shares on the market, for a sample of U.K companies during 1998-2006. As the authors pointed out, stock repurchases can be motivated by any of the following: (i) reducing the dilution of shareholder interests caused by exercise of ESOs, (ii) a desire to manage earnings, and (iii) compensation purposes.

Required:

Stock repurchases may decrease net income and, if so, may even decrease earnings per share (EPS). Explain how this could happen.

Reference no: EM133209393

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