1. Analysis of 2007 Equity Transactions and Their Impact
Transaction 1: Three-for-Two Stock Split (April 2007)
Effect: Every shareholder received 1 additional share for every 2 shares held, increasing the
number of shares issued and outstanding by 50%. The par value per share remains
unchanged, but the total par value increases. For accounting, the par value of new shares is
transferred from retained earnings to common stock.
Valuation: For a large stock split, the transfer is at par value (not market value).
Impact on Jimmy: The value of each individual share or option would decrease
proportionally, but the total value of his holdings would remain unchanged. His number of
options and restricted shares would also increase proportionally if he had been at the
company (options typically adjust for splits) [1] .
Transaction 2: Purchase of 112,199 Class A Shares (Treasury Stock)
Effect: The company repurchased shares at $29.70 each, increasing treasury stock (a
contra-equity account) by the total cost. Outstanding shares decrease, but issued shares
remain the same.
Valuation: Treasury stock is recorded at cost under the cost method.
Impact on Jimmy: Fewer shares outstanding can increase earnings per share (EPS),
potentially increasing the value of each share and option [1] .
Transaction 3: Exercise of 147,017 Employee Stock Options
Effect: Employees exercised options at $5.09 per share. Treasury stock decreases by the
number of shares issued, and cash increases by the exercise price. The difference between
the cost of treasury shares and the exercise price is adjusted in Additional Paid-in Capital
(APIC).
Valuation: Cash increases by $748,325 (147,017 × $5.09). Treasury stock decreases by the
cost basis of those shares. Any excess of cost over exercise price reduces APIC.
Impact on Jimmy: More shares outstanding can dilute EPS, but the effect is usually minor
unless the number is large [1] .
Transaction 4: Conversion of 11,545 Class B Shares to Class A
Effect: The number of Class B shares outstanding decreases, and Class A increases by the
same amount. No change in total equity or total shares outstanding.
Valuation: No cash or APIC change; just a reclassification between classes.
Impact on Jimmy: No direct impact on value, but could affect voting rights if he held either
class [1] .
Transaction 5: Net Income and Foreign Currency Translation Loss
Effect: Net income of $64.79 million increases retained earnings. A foreign currency
translation loss of $16.5 million decreases Accumulated Other Comprehensive Income
(AOCI). No dividends paid, so all net income is retained.
Valuation: Retained earnings increase by net income; AOCI decreases by the translation
loss.
Impact on Jimmy: Higher retained earnings can support future growth and share value.
AOCI is less directly relevant to individual share value but reflects risk from currency
exposure [1] .
Summary Table: 2007 Transactions and Effects
Transaction
Shares
Issued
Shares
Outstanding
Treasury
Stock
APIC
Retained
Earnings
AOCI
Stock Split
+50%
+50%
No effect
No effect
-Par value of
new shares
No
effect
Share
Repurchase
No effect
-112,199
+$3.33M
No effect
No effect
No
effect
Option
Exercise
No effect
+147,017
-$0.75M
Adjusted
No effect
No
effect
B to A
Conversion
No effect
No effect
No effect
No effect
No effect
No
effect
Net Income &
FX Loss
No effect
No effect
No effect
No effect
+$64.79M
-$16.5M
2. Shareholders' Equity Section as at September 29, 2007
Using the opening balances from September 30, 2006 and the 2007 transactions:
Common Stock (Class A & B): Increased due to the stock split.
Additional Paid-in Capital (APIC): Adjusted for option exercises and possibly for the stock
split if necessary.
Retained Earnings: Increased by net income, reduced by the par value of new shares
issued in the split.
Treasury Shares: Increased by repurchases, decreased by option exercises.
AOCI: Decreased by the foreign currency translation loss.
Pro-forma (illustrative, numbers rounded for clarity):
(dollars in thousands)
29-Sep-07 (Pro-forma)
Class A Common Stock (par $1)
~27,000
Class B Common Stock (par $1)
~6,000
Additional Paid-in Capital
~220,000
Retained Earnings
~388,000
(dollars in thousands)
29-Sep-07 (Pro-forma)
Treasury Shares (A)
~-45,000
Treasury Shares (B)
~-5,100
Accumulated OCI
~-43,600
Total Shareholders' Equity
~547,300
Note: Exact values require detailed calculations using all share movements and par values, but
the above reflects the direction and nature of changes.
3. 2008 Equity Transactions and Pro-forma Balance Sheet
Key 2008 Transactions:
Equity Offering: 2,875,000 new Class A shares at $31/share, raising $84.5M net. Increases
cash, increases Class A common stock (par value), and increases APIC (amount above par).
Option Exercises: 342,695 Class A shares issued from treasury at $5.33/share. Treasury
stock decreases, cash increases, APIC adjusted for any difference.
Net Income: $81.345M increases retained earnings.
No dividends reported.
Effects:
Common Stock: Increased by new shares issued (2,875,000 × $1 par = $2.875M).
APIC: Increased by the excess over par from the equity offering and option exercises.
Treasury Shares: Decreased by the cost of shares issued for option exercises.
Retained Earnings: Increased by net income.
AOCI: Not specified for 2008, but prior years show large swings due to currency translation.
Pro-forma Equity Section (as at September 27, 2008):
(dollars in thousands)
27-Sep-08 (Actual)
Class A Common Stock
40,676
Class B Common Stock
7,934
Additional Paid-in Capital
280,903
Retained Earnings
448,879
Treasury Shares (A)
-48,949
Treasury Shares (B)
-5,095
Accumulated OCI
7,566
Total Shareholders' Equity
731,914
Transaction Effects on Financial Statements:
Transaction
Income
Statement
Balance Sheet
Cash Flow Statement
Equity Offering
+Cash, +Common Stock,
+APIC
None
+Cash from financing
Option
Exercise
-Treasury Stock, +Cash,
+APIC
None
+Cash from financing
Net Income
+Retained Earnings
+Net Income
+Cash from operations (if cash
earnings)
4. Accounting for Jimmy's Stock Options (Post-2005 FASB Rules)
Assumptions:
12,000 options granted at $5.00 (at-the-money), fair value $3.00/option at grant date.
Vesting over 5 years, first options vest immediately.
All options exercised when stock reaches $10/share.
Company issues new shares to satisfy exercise.
Accounting Treatment:
At Grant Date:
Total fair value: 12,000 × $3 = $36,000.
Expense recognized over vesting period (straight-line: $7,200 per year for 5 years).
Debit Compensation Expense, Credit APIC.
Each Year Until Vesting:
Recognize $7,200 compensation expense.
Increase APIC by $7,200.
At Exercise:
Employee pays $5 × 12,000 = $60,000 to company.
Company issues 12,000 new shares.
Common Stock increases by $12,000 (par value $1/share).
APIC increases by ($60,000 - $12,000) = $48,000 from cash received.
APIC also includes the $36,000 previously credited for compensation expense.
Summary Table: Option Accounting
Event
Compensation Expense
APIC Increase
Cash
Common Stock
Grant (Year 1)
$7,200
$7,200
0
0
Years 2-5
$7,200/year
$7,200/year
0
0
Exercise (Year 6)
0
$48,000 + $36,000
$60,000
$12,000
Key Points:
Total compensation expense over vesting: $36,000.
APIC increases by $36,000 (expense) + $48,000 (exercise excess over par).
Common stock increases by par value of shares issued.
Cash increases by total exercise price paid.
References: All explanations and calculations are based on the attached case study and
standard accounting principles as described in the provided document [1] .
⁂
1. HBS-Jimmy-Fu-and-Moog-Inc.docx