Bristol-Myers Squibb is one of the largest pharmaceutical companies in the world. In 2002 the company granted executives options to purchase 40,112,732 shares of common stock. Suppose all shares were granted with an exercise price of $37.55 per share, which was the market price of the stock on the date the options were granted, and all options could be exercised anytime between 3 and 5 years from the grant date, provided that the executive still works for Bristol-Myers Squibb. Under the rules in place for accounting for stock options in 2002, Bristol-Meyers Squibb was not required to record an expense on its income statement for the compensation expense related to these options. However, the company was required to disclose information about the stock options, including the impact the options would have had on income if they had been expensed.
Assume that at the same time the stock options were issued, Bristol-Myers Squibb also issued warrants with the same $37.55 exercise price that are exercisable any time in the next 5 years. The company received $12 for each such warrant.
1. Under the rules in place in 2002, no expense was recorded. How would this answer differ in 2012?
2. How much value was there to the executive for each stock option issued in 2002? Given the vesting and exercise provisions, how much might executives have realized from these options by 2012? Use one of the Web-based financial sites to review the price performance of Bristol-Myers over these 10 years.
3. How much did it cost the firm for each stock option that was issued?
4. Might the fact that individual executives hold stock options affect their decisions about declaring dividends? Comment on the ethics of this influence.