Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa 15/09/2014Ricardo F Reis 6 th session: Financial Measures.

Apresentação em tema: "Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa 15/09/2014Ricardo F Reis 6 th session: Financial Measures."— Transcrição da apresentação:

1 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa 15/09/2014Ricardo F Reis rireis@fcee.ucp.pt 6 th session: Financial Measures of Performance and Executive Compensation Performance Evaluation IMSc in Business Administration October-November 2007

2 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa 15/09/2014Ricardo F Reis rireis@fcee.ucp.pt Financial accounting measures of performance Computing Earnings per Share (EPS)

3 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 02 - 3/24 15/09/2014 Performance Evaluation Computing Earnings per Share (EPS) Earnings per share indicates the income earned by each share of common stock. Reported at the end of the income statement Should report intermediate components as well.

4 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 02 - 4/24 15/09/2014 Performance Evaluation EPS on Simple Capital Structure  Simple Capital Structure means that there is only common stock and there is no potential common stock (securities that can potentially be converted into common stock and dilute EPS). EPS= Net Income Weighted Average Number of Shares

5 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 02 - 5/24 15/09/2014 Performance Evaluation Preferred Stock Dividends  Preferred Stock Dividends are compensation not available for common stockholders, therefore they are subtracted from the Net Income. EPS= Net Income – Preferred Dividends Weighted Average Number of Common Stock

6 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 02 - 6/24 15/09/2014 Performance Evaluation Weighted Average Number od Shares Outstanding  Weighted by the fraction of the period they are outstanding  Find the equivalent number of whole shares outstanding for the year.

7 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 02 - 7/24 15/09/2014 Performance Evaluation Stock Dividends and Stock Splits  When these happen computation of the average number of shares outstanding needs to be redone.  A stock dividend or split does not change the shareholders’ total investment.

8 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 02 - 8/24 15/09/2014 Performance Evaluation Complex Capital Structure  Dilutive securities are securities that can be converted into common stock (through conversion or exercise) and will dilute earnings per share.

9 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 02 - 9/24 15/09/2014 Performance Evaluation Diluted EPS Note that: Only dilutive securities are to be reported! Antidilutive are not considered. EPS= Net income- Preferred dividends - Impact of Convertibles - Impact of Option, Warrants, and Other Dilutive Securities Weighted Average Shares Outstanding

10 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 02 - 10/24 15/09/2014 Performance Evaluation Diluted EPS – Convertible Securities If-Converted Method 1. Conversion of the convertible securities as soon as possible (beginning of period or issuance) 2. Elimination of related interest, net of tax.  Logic is that if the convertible securities were converted, then they didn’t produce any interest and net income has to be filtered of this.

11 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 02 - 11/24 15/09/2014 Performance Evaluation Diluted EPS – Options and Warrants Treasury Stock Method 1. Exercise of options or warrants as soon as possible (beginning of period or issuance) 2. Proceeds from the exercise are used to purchase common stock.

12 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 02 - 12/24 15/09/2014 Performance Evaluation ROE – Walgreen’s Dupont Reduced Analysis ROE18,42%18,22%17,50%17,52% Net Income$1.750,60$1.559,50$1.349,80$1.176,00 Net Sales$47.409,00$42.201,60$37.508,20$32.505,00 Common Equity$10.115,80$8.889,70$8.227,00$7.196,00 Total Assets$17.131,10$14.608,80$13.342,00$11.658,00 Profit Margin3,69%3,70%3,60%3,62% Assets Turnover 2,99 3,02 3,00 3,02 Financial Leverage 1,67 1,63 1,62 1,60 18,42%18,22%17,50%17,52%

13 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa 15/09/2014Ricardo F Reis rireis@fcee.ucp.pt Executive Compensation Stock Based Compensation Plans

14 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 02 - 14/24 15/09/2014 Performance Evaluation Stock Compensation Plans  Warrants used to pay and motivate employees  Stock option gives selected employees the right to purchase common stock at a given price over an extended period of time.

15 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 02 - 15/24 15/09/2014 Performance Evaluation

16 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 02 - 16/24 15/09/2014 Performance Evaluation

17 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 02 - 17/24 15/09/2014 Performance Evaluation Stock Compensation Plans  Effective compensation programs are the ones that: 1. Motivate employees to high levels of performance 2. Help retain executives and allow for the recruitment of new talent 3. Base compensation on employee and company performance 4. Maximize the employee’s after-tax benefit and minimize the employee’s after-tax cost 5. Use performance criteria over which the employee has control

18 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 02 - 18/24 15/09/2014 Performance Evaluation Stock Compensation Plans  Cash compensation is important, but they are short-run oriented  Long-term compensation plans develop in key employees a strong loyalty towards the company, by giving them “a piece of the action”.

19 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 02 - 19/24 15/09/2014 Performance Evaluation Major reporting issues  What is being granted when you grant stock options? What is the cost?  Suppose you are granted ptions to purchase 10,000 shares of the firm common stock as part of your compensation. The options are good for 10 years, the market and exercise price are both $20 at the grant date.

20 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 02 - 20/24 15/09/2014 Performance Evaluation Intrinsic Value Method  Report as compensation cost: The difference bewteen the market price of the stock and the exercise price of the options at the grant date.  So in this case, the cost of granting these options would be 0.

21 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 02 - 21/24 15/09/2014 Performance Evaluation Fair value method  FASB encourages the recognition of compensation cost for the fair value of the stock-based compensation paid to employees for their services.

22 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 02 - 22/24 15/09/2014 Performance Evaluation Fair value method  How should the compensation expense be determined?  Over what periods should the compensation expense be allocated?

23 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 02 - 23/24 15/09/2014 Performance Evaluation Determining expense  Total compensation expense is computed based on the fair value of the option expected to vest on the grant date.  Fair value for public companies is to be estimated using an option pricing model.  No adjustments are to be made after the grant date!

24 Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa Ricardo F Reis rireis@fcee.ucp.pt Session 02 - 24/24 15/09/2014 Performance Evaluation Allocating Compensation Expense  Compensation expense to be recognized over the period where the employee performs the service – service period.