Question

The flowing numbers come from an equity statement for fiscal year 2011 (in millions):

Shareholders’ equity May 31, 2010 $2,700

Issue of shares for exercise of stock options 405

Repurchase of shares (132)

Net income 467

Unrealized loss on debt securities (23)

Tax benefit from the exercise of stock options 70

Common dividends paid (250)

Preferred dividends paid (10)

Shareholders’ equity May 31, 2011 3,227

The firm’s tax rate is 35 percent. Shareholders’ equity at May 31, 2010 includes $120 million in preferred stock.

a. Calculate the loss to common shareholders from the exercise of stock options.

b. Present a reformulated statement of common shareholders’ equity that identifies comprehensive income and separates it from net payout to shareholders.

c. What was the return on common equity (ROCE) for the year? (Use beginning equity in this calculation.)

Answer 1

a) Calculation of loss to common shareholders from the exercise of stock options

Tax benefits from exercise of Stock Options	70
Divide : Tax Rate	35%
Loss Before Tax	200
Tax Benefit	70
Loss After Tax	130

b) Reformulated statement of common shareholders’ equity

Common Equity March 31,2010 (2,700-120)		2,580
Net Payouts:
Cash Dividend	250
Share Repurchases	132
Share Issues (405+200)	(605)	223
Comprehensive Income:
Net Income	467
Unrealized loss on Debt Securities	(23)
Loss on Stock Options	(130)
Preferred Dividend	(10)	304
Common Equity March 31,2011 (3,227-120)		3,107

Working Note:

• Preferred equity has been subtracted from opening and closing equity.
• Share issued for stock options are recorded at market value. Share issues on stock options + loss on stock options.

C) Return on Common Equity

ROCE = Income / Beginning common equity

= 304 / 2,580

= 11.78%

So ROCE is 11.78%.

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