Extra Fed Ex Case Spring 2016 - suggested solution PDF

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Measurement and Disclosure FedEx Case...

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FedEx 2012 Stock-Based Compensation Case ACCT 30120 Spring 2015 Suggested Solution (All questions related to year-ended May 31, 2012) The price of FedEx stock at May 31, 2012 was $85.25. Access FedEx’s Form 10-K for the year ended May 31, 2012 and answer the following questions. 1.

What amount of stock-based compensation expense did FedEx recognize in 2012? $105 million (Note 9, Excerpt page 4) Where is this expense reported on the consolidated statement of earnings and what is this amount as a percentage of operating income? In Operating Expenses as “Salaries and employee benefits” (Note 9, Excerpts page 5). This is 3.3% of Operating Income” on Excerpts page 3 ($105/$3,186).

2.

What is the amount of total compensation cost of the two types (stock options and restricted stock) of stockbased compensation plans granted by FedEx in 2012? Why is this amount not equal to the compensation expense from question #1? Total compensation cost of the two types of stock based compensation awards granted in 2012 is $117,910,993 (stock options $98,836,771 ([$29.92 × 3,303,368] + restricted stock $19,073,993 [$88.95 × 214,435]). See Excerpts pages 5 and 6. This compensation cost will be recognized as compensation expense on a straight-line basis over the requisite service period (vesting period) of the award (Note 9, page 5). The $105 million compensation expense recognized in 2012 is the sum of prior years’ compensation cost from unvested stock options and unvested restricted stock that is being amortized and recognized in 2012.

3.

During fiscal year 2012, employees forfeited 2,530 shares of restricted shares valued at approximately $190,000. In addition, FedEx employees forfeited 292,583 stock options. Why would employees forfeit restricted stock or stock options? Restricted stock and stock options are forfeited when key employees leave the firm before they are fully vested. Stock options are also forfeited when the options expire and the exercise price of the stock option > fair value of the firm’s common stock.

4.

Fiscal years 2012 stock options are valued at $29.92. Use the CBOE option pricing calculator http://www.cboe.com/tradtool/option-calculators.aspx to verify this calculation. You will need to make an assumption but should be able to come close to the reported value. The CBOE calculator computes fair value of the option as $29.82 assuming the weighted average exercise price ($87.90) equals the fair value of stock on the date of grant and using the input data provided on Excerpts page 5 (Life = 6 years or 2,190; Volatility = 34%; Risk-free interest rate = 1.79%; dividend yield = 0.563% or $0.4949, computed by multiplying the dividend yield of 0.00563 by the average exercise price of $87.90).

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5.

In 2012, FedEx changed its risk-free interest rate assumption from 2.36% to 1.79%. How did this change affect the estimated fair value of its options? Did the change decrease or increase the fair value of the option. The change decreased the value of the option holding other parameters constant. The risk-free rate and option value are positively correlated.

6.

Page 96 states that the Aggregate intrinsic value of outstanding options is $193 million. Show how FedEx would have computed this amount. What is the difference in meaning between exercisable and outstanding? Assuming all of the outstanding shares are in-the-money, one would multiply the 21,031,538 shares by the year end average intrinsic value of $0.86 (85.25-84.39) to obtain $18.1 million. The reason for the difference is that the weighted average exercise price of $84.39 includes many out-of-the-money options. The $193 million includes only in-the-money options.

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Exercisable means that the options are vested and could be exercised by the employee. Outstanding includes both vested and unvested options. 7.

The “Financial Activities” section of the Consolidated Statement of Cash Flows reports $128 million as “Proceeds from stock issuances.” These cash proceeds are from stock-based compensation. Reconcile this amount to data disclosed in financial statement footnote “STOCK-BASED COMPENSATION”. Stated differently, show how FedEx arrived at $128 million. $59.73 weighted-average exercise price from page 96 (Excerpts page 5) × (2,142,410 options exercised) = $127,966,149

8.

Were the actual tax benefits received by FedEx from the exercise of stock options in 2012 higher or lower than the Deferred income tax asset that had been established previously? Explain. The Statement of Cash Flows (Excerpts page 4) has a positive amount of $18 with the caption “Excess tax benefit on the exercise of stock options.” This indicates that actual tax benefits received exceeded the related Deferred income tax asset. If the tax benefits had been less, the difference would have been shown as a decrease to “Cash provided by operating activities.”

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