Adobe Inc SE suggested solution PDF

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This is the suggested solution set for a Financial Accounting pset about Adobe....

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The University of Chicago Booth School of Business

Financial Accounting 30000

Adobe Systems, Inc. Stock splits, dividends, and stock repurchases Adobe Systems Inc. (Adobe) is a California-headquartered multinational software company focused on digital media and digital marketing, founded in 1982. Adobe went public in August 1986 at a split-adjusted share price of $0.17; and, as of December 2017, the company’s market capitalization was $85.9 billion. The company had six stock splits with the first one in March 1987. The latest two-for-one stock split happened in May 2005. After this stock split, the company ceased paying cash dividends. Instead, it engaged in stock repurchase (buyback) programs. Answer the following questions using excerpts from the Adobe’s 10-K for the fiscal year ending December 02, 2016. 1. Why do you think Adobe splits its shares? What is the effect of stock splits on Shareholders' Equity, return on equity (defined as Net Income/Stockholders’ Equity), and return on assets (defined as Net Income/Total Assets)? Answer: Adobe splits its shares to reduce its price per share in order toincrease liquidity by making it more attractive to investors. It also may try to signal its confidence in the future, i.e., that the stock price will continue to grow. There is no effect on Shareholders’ Equity, return on equity, or return on assets. 2. Why do you think Adobe engages in stock repurchases? Answer: Most likely, Adobe uses repurchased shares for employee stock option plans (i.e., to avoid dilution when employees exercise their stock options). Stock repurchases are also a way to return cash to shareholders. 3. Answer the following questions for the fiscal year ending December 02, 2016. a. How many shares did Adobe buy back in fiscal year 2016? Answer: Adobe repurchased 10,427 thousand shares (Statement of Stockholders’ Equity) b. What was the average price Adobe paid to buy back these shares? Answer: The number of purchased shares is 10,427 thousand; the value paid is $1,075,000 thousand. Therefore, the average price is $1,075,000/10,427 = $103.10 per share. (Statement of Shareholders’ Equity)

c. How many shares did Adobe re-issue from the treasury under its employee compensation plans in fiscal year 2016? Answer: The number of treasury stock re-issued under stock compensation plans is 6,872 thousand. d. What was the average amount per share Adobe received from its employees on shares re-issued under its employee plans in fiscal year 2016? The total cash received can be found on the statement of cash flows. Answer: The number of shares re-issued is 6,872; Proceeds from re issuance of treasury stock is $145,697. Hence, the average price is $145,697/6,872 = $21.20 (Statement of Cash Flows and Statement of Shareholder’s Equity)

e. How does the amount you calculated in part (d) compare with the average price Adobe paid to buy back its shares in fiscal year 2016? What explains the difference? Answer: The average share price that Adobe paid is higher than the average share price that employees paid. This is expected since Adobe has to buy its own shares back at the market price whereas the employees received employee stock options as part of their compensation and would only exercise the options if the market price is higher than the exercise price.

4. Does Adobe account for its stock buybacks as “Treasury Stock” or as “Retirement of Shares” in 2016? Explain its accounting treatment of stock buybacks. Answer: Adobe treats its buybacks as treasury stock. The treasury shares are a contra- shareholders’ equity account (XSE) which reduces Shareholders’ Equity. DR Treasury shares (XSE, -SE) CR Cash (-A)

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5. What are the effects of Adobe's stock buybacks on Total Assets, return on equity (defined as Net Income/Stockholders’ Equity), and leverage (defined as Total Liabilities/Total Stockholders’ Equity)? Answer: Everything else equal (i.e., assuming no effect on Net Income from financing costs) the buybacks will reduce Total Assets (Cash decreases), return on equity increases (Shareholders’ Equity decreases), and Leverage increase (Shareholders Equity decreases)...