Question: Treasury shares and their effects on performance ratios. Exhibit 14.14 presents the changes in common shareholders' equity of Monk Corporation for 2006 through 2008. Monk

Treasury shares and their effects on performance ratios. Exhibit 14.14 presents the changes in common shareholders' equity of Monk Corporation for 2006 through 2008. Monk regularly purchases shares of its common stock and reissues them in connection with stock option plans. It will usually issue a small number of new common shares when it requires fractional shares to complete a stock option transaction. Earnings per common share were $2.70 for 2006, $3.20 for 2007, and $3.83 for 2008.

a. Give the journal entries for 2008 to record (1 the issue of common shares in connection with stock option plans. and (2) the purchase of treasury stock.

b. Compute the percentage change in net income and in earnings per share between 2006 and 2007, and between 2007 and 2008. Why do the percentage changes in earnings per share exceed the percentage changes in net income in both 2007 and 2008?

c. Compute the book value per outstanding common share at the end of 2006, 2007, and 2008, and the percentage change in book value per share between 2006 and 2007, and between 2007 and 2008. Why are the percentage changes in book value per common share less than the percentage changes in both net income and earnings per share?

d. Compute the rate of return on common shareholders' equity for 2005. 2006. and 2007.
e. Does Monk appear to acquire the treasury stock primarily to satisfy commitments under stock option plans?Explain.

Monk Corporation Analysis of Changes in Common Shareholders' Equity (all dollar amounts in millions) (Problem 38) EXHIBIT 14.14 Treasury Stock Common Stock Retained Shares Amount Earnings Shares Total Amount December 31, Year 2005 ......1,483.168 Net Income.. Dividends Stock Options Exercised.. Treasury Stock Purchased. December 31, 2006... Net Income Dividends Stock Options Exercised Treasury Stock Purchased December 31, 2007... Net Income Dividends Stack Options Exercised.. Treasury Stock Purchased December 31, 2008.. $4,667.8 $10,942.0 (235.342) S(4,470.8) $11,139.0 3,376.6 3,376.6 (1,578.0) (1,578.0) 74.7 294.3 0.295 14.104 369.0 (33.377) $4,742.5 $12,740.6 (254.615) (1,570.9) (1,570.9) $(5,747.4) $11,735.7 1,483.463 3,870.5 3,870.5 (1,793.4) (1,793.4) 15.982 426.0 0.156 225.0 651.0 (38.384) $4,967.5 $14,817.7 (277.017) (2,493.3) (2,493.3) S(7,814.7) $11,970.5 .1,483.619 4,596.5 4,596.5 (2,094.8) (2,094.8) 0.307 286.5 14.183 427.6 714.1 (2,572.8) (27.444) (290.278) (2,572.8) .... $17,319.4 S(9,959.9) $12,613.5 1,483.926 $5,254.0

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