In 2003, Microsoft Corp. discontinued its employees’ stock option plan in favor of restricted stock, vesting over a five- year period. At that time, many of its already- granted ESOs were under water (i. e., exercise price greater than share market value).
In 2003, no expense needed to be recorded for ESOs if they were granted with an intrinsic value of zero, since an FASB standard requiring expensing ESO fair value was not effective until fiscal years beginning after June 15, 2005. However, generally speaking, the fair value of restricted stock issued to employees is charged to expense. For 2003, Microsoft reported earnings of $ 1.55 billion, after stock- based compensation expense of $ 2.17 billion. Analysts had expected net income, before stock- based compensation expense, of $ 3.28 billion.

a. Give a reason why Microsoft’s share price would be unaffected by the news of its reduction in reported earnings due to the 2003 stock- based compensation expense. Give reasons why stock price may fall.
b. Give reasons why Microsoft’s share price might rise as a result of this news.
c. Why might Microsoft have eliminated ESOs in its compensation plan?

  • CreatedSeptember 09, 2014
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