10 consejos fiscales para opciones sobre acciones
Si su empresa le ofrece acciones restringidas. Opciones sobre acciones u otros incentivos, escuche. Hay enormes trampas impositivas potenciales. Pero también hay algunas grandes ventajas fiscales si juegas bien tus cartas.
La mayoría de las empresas ofrecen asesoramiento fiscal (al menos general) a los participantes sobre lo que deben y no deben hacer, pero rara vez es suficiente. Hay una sorprendente cantidad de confusión acerca de estos planes y su impacto fiscal (tanto inmediatamente como en el futuro). Aquí hay 10 cosas que usted debe saber si las opciones de acciones o subvenciones son parte de su paquete de pago. (Para obtener más información, consulte Obtener la mayoría de las opciones de compra de empleados.)
1. Existen dos tipos de opciones sobre acciones.
Existen opciones de acciones de incentivos (o ISOs) y opciones de acciones no calificadas (o NSOs). Algunos empleados reciben ambos. Su plan (y su concesión de opción) le dirá qué tipo de dinero está recibiendo. Las ISO se gravan de la manera más favorable. Generalmente no hay impuestos en el momento en que se conceden y no hay impuestos "regulares" en el momento en que se ejercen. A partir de entonces, cuando usted vende sus acciones, usted pagará impuestos, esperemos que como una ganancia de capital a largo plazo. El período habitual de tenencia de la ganancia de capital es de un año, pero para obtener un tratamiento de ganancia de capital para las acciones adquiridas a través de ISOs, debe: (a) mantener las acciones por más de un año después de ejercer las opciones y (b) vender las acciones al menos Dos años después de su ISOs se concedieron. Este último, la regla de dos años atrapa a muchas personas sin saberlo.
2. Las ISOs llevan una trampa AMT. Como señalé anteriormente, cuando se ejerce una ISO no se paga ningún impuesto "regular". Eso podría haberle avisado que el Congreso y el IRS tienen una pequeña sorpresa para usted: el impuesto mínimo alternativo. Muchas personas se sorprenden al descubrir que a pesar de que su ejercicio de una ISO no desencadena impuestos regulares, puede desencadenar AMT. Tenga en cuenta que usted no genera dinero en efectivo al hacer ISOs, por lo que tendrá que usar otros fondos para pagar la AMT o arreglar para vender suficientes acciones en el momento del ejercicio para pagar la AMT.
Ejemplo: Usted recibe ISOs para comprar 100 acciones al precio de mercado actual de $ 10 por acción. Dos años más tarde, cuando las acciones valen 20 dólares, se ejercita, pagando $ 10. El spread de $ 10 entre su precio de ejercicio y el valor de $ 20 está sujeto a AMT. Cuánto pagará AMT dependerá de sus otros ingresos y deducciones, pero podría ser una tasa plana de 28% AMT en el spread de $ 10 o $ 2.80 por acción.
Más tarde, si vende la acción con un beneficio, es posible que pueda recuperar la AMT a través de lo que se conoce como un "crédito de AMT". Pero a veces, si la acción se bloquea antes de vender, usted podría estar atascado pagando una factura grande de impuestos sobre los ingresos fantasma. Eso es lo que sucedió a los empleados golpeados por el busto de puntocom por 2000 y 2001. En 2008 el Congreso aprobó una disposición especial para ayudar a esos trabajadores. Pero no cuente con que el Congreso lo haga de nuevo. Si ejerce ISOs, debe planificar correctamente para el impuesto.
3. Los ejecutivos obtienen opciones no calificadas. Si usted es un ejecutivo, es más probable que reciba todas (o al menos la mayoría) de sus opciones como opciones no calificadas. No se gravan tan favorablemente como ISOs, pero por lo menos no hay trampa de AMT. Al igual que con ISOs, no hay impuesto en el momento de la opción se concede. Pero cuando usted ejercita una opción no calificada, debe impuestos sobre la renta (y, si es empleado, Medicare y otros impuestos sobre la nómina) sobre la diferencia entre su precio y el valor de mercado.
Ejemplo: Usted recibe una opción para comprar acciones a $ 5 por acción cuando la acción cotiza a $ 5. Dos años después, se ejercita cuando la acción se cotiza a $ 10 por acción. Usted paga $ 5 al hacer ejercicio, pero el valor en ese momento es de $ 10, por lo que tiene $ 5 de ingresos de compensación. Luego, si mantiene la acción durante más de un año y la vende, cualquier precio de venta por encima de $ 10 (su nueva base) debería ser una ganancia de capital a largo plazo.
Ejercitar opciones toma dinero y genera impuestos para arrancar. Es por eso que muchas personas ejercen opciones para comprar acciones y vender esas acciones el mismo día. Algunos planes incluso permiten un "ejercicio sin efectivo".
4. Las acciones restringidas usualmente significan impuestos diferidos. Si usted recibe acciones (o cualquier otra propiedad) de su empleador con las condiciones adjuntas (por ejemplo, usted debe permanecer por dos años para obtenerlo o mantenerlo), las reglas especiales de propiedad restringida se aplican bajo la Sección 83 del Código de Rentas Internas. Las reglas de la Sección 83, cuando se combinan con las opciones sobre acciones, generan mucha confusión.
En primer lugar, vamos a considerar pura propiedad restringida. Como una zanahoria para quedarse con la empresa, su empleador dice que si usted permanece con la empresa durante 36 meses, se le otorgará $ 50.000 en acciones. Usted no tiene que "pagar" nada por el stock, pero se le da a usted en relación con la prestación de servicios. No tiene ingresos imponibles hasta que reciba la acción. En efecto, el IRS espera 36 meses para ver qué va a pasar. Cuando usted recibe la acción, usted tiene $ 50.000 de la renta (o más o menos, dependiendo de cómo esas acciones han hecho mientras tanto.) Los ingresos se gravan como sueldos.
5. El IRS no esperará para siempre. Con restricciones que van a desaparecer con el tiempo, el IRS siempre espera a ver qué pasa antes de gravar. Sin embargo, algunas restricciones nunca caducarán. Con tales restricciones de "no lapso", el IRS valora la propiedad sujeta a esas restricciones.
Ejemplo: Su empleador le promete acciones si permanece con la compañía durante 18 meses. Cuando reciba el stock estará sujeto a restricciones permanentes bajo un acuerdo de compra / venta de la compañía para revender las acciones por $ 20 por acción si alguna vez abandona el empleo de la compañía. El IRS esperará y verá (sin impuestos) durante los primeros 18 meses. En ese punto, usted será gravado en el valor, que es probable ser $ 20 dado la restricción de la reventa.
6. Usted puede optar por ser gravado antes. Las reglas de propiedad restringida generalmente adoptan un enfoque de esperar y ver para las restricciones que eventualmente se extinguirán. Sin embargo, bajo lo que se conoce como una elección 83 (b), puede optar por incluir el valor de la propiedad en su ingreso anterior (en efecto sin tener en cuenta las restricciones).
Puede parecer contradictorio elegir incluir algo en su declaración de impuestos antes de que sea necesario. Sin embargo, el juego aquí es tratar de incluirlo en los ingresos a un bajo valor, bloqueando en el futuro tratamiento de ganancias de capital para la apreciación futura. Para elegir impuestos actuales, debe presentar una elección escrita de 83 (b) con el IRS dentro de 30 días de recibir la propiedad. Usted debe informar sobre la elección el valor de lo que recibió como compensación (que puede ser pequeña o incluso cero). Luego, debe adjuntar otra copia de la elección a su declaración de impuestos.
Ejemplo: Su empleador le ofrece acciones de $ 5 por acción cuando las acciones valen $ 5, pero debe permanecer con la empresa por dos años para poder venderlas. Ya ha pagado el valor justo de mercado de las acciones. Esto significa que presentar una elección de 83 (b) podría reportar ingresos cero. Sin embargo, al presentarlo, convierte lo que sería ingreso ordinario futuro en ganancias de capital. Cuando vendes las acciones más de un año después, estarás contento de haber presentado la elección.
7. Restricciones + opciones = confusión. Como si las reglas de propiedad restringida y las reglas de opciones sobre acciones no fueran suficientemente complicadas, a veces hay que lidiar con ambos conjuntos de reglas. Por ejemplo, se le pueden otorgar opciones de acciones (ISO o NSO) que están restringidas; sus derechos a ellas se "conceden" con el tiempo si se queda con la empresa. El IRS generalmente espera a ver qué sucede en tal caso.
Debe esperar dos años para que sus opciones se concedan, por lo que no hay impuestos hasta esa fecha de consolidación. Entonces, las reglas de la opción de la acción asumen el control. En ese momento, usted pagaría impuestos bajo las reglas ISO o NSO. Incluso es posible hacer 83 (b) elecciones para opciones de acciones compensatorias.
8. Necesitará ayuda externa. La mayoría de las compañías intentan hacer un buen trabajo de mirar hacia fuera para sus intereses. Después de todo, los planes de opciones sobre acciones se adoptan para generar lealtad, así como proporcionar incentivos. Sin embargo, por lo general pagará para contratar a un profesional para ayudarle a lidiar con estos planes. Las reglas del impuesto son complicadas, y usted puede tener una mezcla de ISOs, NSOs, acción restringida y más. A veces, las empresas ofrecen asesoramiento personalizado sobre impuestos y planificación financiera a los altos ejecutivos como un beneficio, pero rara vez ofrecen esto para todos.
9. ¡Lea sus documentos! Siempre me sorprende cuántos clientes buscan orientación sobre los tipos de opciones o de acciones restringidas a las que se les ha concedido que no tienen sus documentos o no los han leído. Si busca orientación externa, deberá proporcionar copias de todo su papeleo a su asesor. Que el papeleo debe incluir los documentos del plan de la empresa, los acuerdos que haya firmado que se refieren de alguna manera a las opciones o acciones restringidas, y cualquier subvención o premios. Si realmente obtuvo certificados de acciones, proporcione copias de los mismos. Por supuesto, te sugiero que primero leas tus documentos. Usted puede encontrar que algunas o todas sus preguntas son contestadas por los materiales que usted ha recibido.
10. Cuidado con la temida sección 409A. Por último, tenga cuidado con una sección particular del Código de Rentas Internas, 409A, promulgada en 2004. Después de un período de confusión de orientación transitoria, ahora regula muchos aspectos de los programas de compensación diferida. Cada vez que vea una referencia a la sección 409A que se aplica a un plan o programa, obtenga alguna ayuda externa.
Generalmente, los beneficios por muerte en el seguro de vida que se pagan a un beneficiario en una suma global no se incluyen como ingresos para el. Leer respuesta completa >>
En primer lugar, entiendo que no hay un sistema universal con respecto a las comisiones de negociación cobradas por las firmas de corretaje. Algunos cobran. Leer respuesta completa >>
Los ratios de deuda se pueden utilizar para describir la salud financiera de individuos, empresas o gobiernos. Como otras cuentas. Leer respuesta completa >>
No, la contribución de su empleador no cuenta para su contribución a su plan 401 (k). En 2016, un empleado puede contribuir. Leer respuesta completa >>
Un derivado es un contrato entre dos o más partes cuyo valor se basa en un activo financiero subyacente acordado. Leer respuesta completa >>
Una cuenta que se puede encontrar en la parte de activos del balance de una empresa. La buena voluntad a menudo puede surgir cuando una empresa.
Un fondo de índice es un tipo de fondo mutuo con una cartera construida para igualar o rastrear los componentes de un índice de mercado, tales.
Un contrato de derivados mediante el cual dos partes intercambian instrumentos financieros. Estos instrumentos pueden ser casi cualquier cosa.
Aprenda lo que es EBITDA, vea un video corto para aprender más y con lecturas le enseñamos cómo calcularlo usando MS.
El valor actual neto (VAN) es la diferencia entre los valores actuales de las entradas y salidas de efectivo. Se utiliza en el presupuesto de capital.
¿Qué es cuatro años con un año de acantilado?
Cuatro años con un año de acantilado es el calendario de consolidación típico para los fundadores de inicio & # 8217; valores.
Bajo este programa de consolidación. Los fundadores invertirán sus acciones durante un período total de cuatro años. El acantilado de un año significa que los fundadores no se investirá con respecto a las acciones hasta el primer aniversario de la emisión de acciones fundadores.
Con motivo del aniversario de un año, los fundadores entregarán cada uno el 25% de su total de acciones. Vesting suele ocurrir mensualmente después de que el acantilado expire.
Aquí es lo que un & # 8220; 4 años con un acantilado de un año & # 8221; Se ve como en un documento legal:
& # 8220; El 25% del número total de Acciones de la Fundadora se liberará de la Opción de Recompra en el aniversario de un año de este Acuerdo, y un número adicional de 1/48 del número total de Acciones será liberado de La Opción de Recompra en el día correspondiente de cada mes posterior, hasta que todas las Acciones del Fundador hayan sido liberadas en el cuarto aniversario de este Acuerdo. & # 8221;
La opción de recompra & # 8222; Es simplemente la opción de la compañía de recomprar las acciones no liquidadas de Founder después de la partida de Founder1 de la compañía startup. Además, debe tener en cuenta que los programas de consolidación de derechos activan otras cuestiones complejas como el impuesto, por lo que, por favor, no simplemente copie el texto anterior y péguelo en un acuerdo de compra de acciones.
Mensaje de navegación
4 pensamientos sobre & ldquo; ¿Qué es cuatro años con un año de acantilado? & Rdquo;
[& # 8230;] el básico de docenas de cuestiones legales que se presentará con su inicio. Todo de 83b a la adquisición [& # 8230;]
Mensaje impresionante. He estado sacando mi pelo buscando una buena manera de mantener a los compañeros en línea.
[& # 8230;] Período & # 8211; Esto debe ser discutido junto con la división de la equidad. Un período de 4 años de adquisición con un acantilado de 1 año es muy común, pero he oído hablar de más [
SQI Diagnostics anuncia la concesión de opciones sobre acciones
SQI Diagnostics Inc. ( "SQI Diagnostics" o la "Compañía"), una compañía de ciencias de la vida que desarrolla y comercializa tecnologías y productos patentados para Diagnóstico avanzado de microarrays, anunció hoy que a partir del 14 de marzo de 2016. ha otorgado 2.054.000 opciones de compra de acciones como parte de un plan de incentivos a largo plazo para toda la Compañía. El objetivo de la subvención es alinear los intereses de todos los empleados con los de los accionistas. Se han otorgado 1.638.000 opciones a ciertos funcionarios y directores. Los directores independientes no recibieron opciones en esta subvención.
Las opciones fueron otorgadas a un precio de ejercicio de $ 0.30. De acuerdo con el plan de opciones sobre acciones previamente aprobado, las opciones se otorgan en tres cuotas iguales anualmente en un período de tres años y vencen después de cinco años, si no se ejercen. Tras la concesión de estas opciones habrá 3.764.000 opciones pendientes. Actualmente hay 69.347.000 acciones ordinarias en circulación.
Acerca de SQI Diagnostics SQI Diagnostics es una empresa de ciencias biológicas y diagnósticos que desarrolla microarrays y ensayos moleculares de grado clínico multiplexados que se ejecutan en su instrumentación automatizada para los mercados de investigación farmacéutica, sanidad animal y diagnóstico clínico. SQI desarrolla investigaciones personalizadas y ensayos de diagnóstico que son multiplexados; Lo que significa la simplificación, consolidación y automatización de muchas pruebas individuales en una sola. Esto aumenta el rendimiento de la muestra, reduce el tiempo, el costo y la probabilidad de error humano, y proporciona una excelente calidad de los datos. Para obtener más información, visite sqidiagnostics. com.
Declaraciones prospectivas Este comunicado de prensa contiene ciertas palabras y declaraciones, que pueden constituir "declaraciones prospectivas" en el sentido de las leyes de valores aplicables. Dichas declaraciones reflejan las opiniones actuales de la Compañía con respecto a eventos futuros y están sujetas a ciertos riesgos e incertidumbres detallados en las presentaciones en curso de la Compañía con las autoridades reguladoras de valores, accesibles al público en www. sedar. com. Los resultados reales, los eventos y el rendimiento pueden diferir materialmente. Se advierte a los lectores que no depositen una confianza indebida en estas declaraciones prospectivas. La Compañía no asume ninguna obligación de actualizar o revisar públicamente ninguna de las declaraciones prospectivas, ya sea como resultado de nueva información, eventos futuros o de otro tipo, excepto como lo requieren las leyes de valores aplicables.
Ni la Bolsa de Valores de TSX ni su Proveedor de Servicios de Regulación (según se define ese término en las políticas de la Bolsa de Valores de TSX) aceptan la responsabilidad de la adecuación o exactitud de este comunicado.
FUENTE SQI Diagnostics Inc.
Director General, Andrew Morris, 416.674.9500 ext. 229, amorris@sqidiagnostics. com; Vicepresidente de Finanzas, Patricia Lie, 416.674.9500 ext. 277, plie@sqidiagnostics. com
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Acciones vs Stock Options
En este artículo se describen los pros y los contras de las opciones de acciones vs acciones para los empleados de Canadian & # 8211; Privado y público & # 8211; compañías. Las cuestiones fiscales son poco conocidas y pueden ser muy confusas. Las regulaciones fiscales actuales pueden dificultar que las empresas traigan nuevos empleados y socios como accionistas.
Opciones de acciones son una forma popular para las empresas a atraer a los empleados clave. Son la mejor opción para compartir la propiedad. Los empleados están motivados para agregar valor a sus empresas de la misma manera que fundador / propietarios son. Las opciones son también una parte clave de un paquete de compensación. En las empresas más grandes, las opciones contribuyen sustancialmente. A menudo muchas veces la parte salarial - a los ingresos. En una reciente encuesta de compensación de ejecutivos (ver www. vancouversun. com/execpay), los 100 mejores ejecutivos de empresas públicas con sede en BC ganaron más de $ 1 millón en ingresos de 2009. Sin embargo, sólo 5 de ellos recibieron sueldos base de más de $ 1 millón. La mayor parte de la compensación provenía de opciones de acciones - no es de extrañar que la CRA (Agencia de Ingresos de Canadá) quiera imponerles impuestos!
Desafortunadamente, la legislación fiscal puede convertir las opciones sobre acciones en un enorme desincentivo para atraer empleados clave. Por ejemplo . Si un empleado de una empresa (privada o pública) ejerce opciones para comprar acciones, ese empleado puede tener una obligación tributaria incluso si vende las acciones a pérdida. Si la empresa falla, la responsabilidad no desaparece. El tratamiento tributario no es el mismo para las empresas privadas controladas canadienses (CCPCs) como lo es para las empresas públicas o no-CCPC. Las CCPC tienen una ventaja sobre otras empresas canadienses.
Para CCPCs - Corporaciones Privadas Controladas Canadiense
Esta discusión es aplicable a las Compañías Privadas Controladas Canadiense (CCPCs). Se trata de cómo una start-up puede obtener mejores acciones en las manos de los empleados, mientras que estar al tanto de posibles problemas fiscales.
Para dar a los empleados una participación de propiedad (e incentivo) en la empresa, la mejor solución es darles fundadores partes al igual que los fundadores tomaron por sí mismos cuando la empresa se formó. Las empresas deben emitir acciones de fundadores de la tesorería lo más pronto posible. Algunas compañías emiten acciones de fundadores extra y las mantienen en un fideicomiso para futuros empleados. A veces, los fundadores transferirán parte de sus propios fundadores a nuevos socios. Como regla general, tratar de dar a los empleados fundadores partes temprano en la vida de la empresa. Sin embargo, asegúrese de que las acciones se inviertan en el tiempo (o en función del desempeño), de modo que los que abandonan el trabajo y los que no lo hacen no obtienen un pase gratis.
Al poseer acciones en una CCPC (Canadian Controlled Private Corporation) durante al menos 2 años, los accionistas obtienen el beneficio de la exención de ganancias de capital de por vida de $ 750,000 (es decir, no pagan impuestos sobre los primeros $ 750K en ganancias de capital). Este es un gran beneficio. También obtienen una deducción del 50% sobre ganancias adicionales.
Si una empresa está más allá de su fase de puesta en marcha, existe la preocupación de que si estas acciones se dan simplemente (gratis o por peniques) a un empleado, CRA (Agencia de Rentas de Canadá) considera este beneficio de empleo & # 8222; Sobre el cual se paga el impuesto sobre la renta. Este beneficio es la diferencia entre lo que el empleado pagó por las acciones y su FMV (Fair Market Value).
Este beneficio se grava como ingreso ordinario de empleo. Para las CCPC, este beneficio puede ser diferido hasta que se vendan las acciones. Si se mantiene durante más de 2 años, también hay una deducción del 50% disponible en el beneficio. Si se mantiene por menos de 2 años, se puede usar otra deducción del 50% si las acciones se compran en FMV.
Sin embargo, si las acciones se venden más tarde (o se considera que se vendieron en virtud de una liquidación) a un precio inferior al valor de mercado en el momento de la adquisición, el impuesto sobre el beneficio diferido está TODAVÍA DADO. Y, aunque esta pérdida (es decir, la diferencia entre el FMV y el precio de venta) es una pérdida de capital, no compensa el impuesto adeudado. Puede ser posible reclamar un ABIL (Pérdida de Inversión Empresarial Permitida) para compensar el impuesto que se debe sobre el beneficio diferido, es decir, si usted compra acciones en una CCPC, puede reclamar el 50% de su pérdida de inversión y deducir de otros ingresos.
Aparte de la emisión de acciones de fundadores de costo cero, el siguiente mejor enfoque es vender acciones a los empleados a un "buen" precio que se podría argumentar que está en FMV considerando las restricciones sustanciales de las acciones (por ejemplo, inversión inversa y riesgo de confiscación). Esto puede funcionar bien si la empresa es todavía muy joven y no ha recaudado sumas sustanciales de inversores independientes.
(En el caso de las compañías que cotizan en bolsa, las bonificaciones de opciones son la norma, ya que el FMV puede determinarse fácilmente y un beneficio se evalúa y porque las regulaciones a menudo impiden la emisión de acciones de costo cero, pero para los pubcos y no CCPCs , El impuesto sobre estas prestaciones no podrá ser aplazado y se pagará en el ejercicio en el que se ejerce la opción, lo que constituye un problema real para las pequeñas empresas públicas cotizadas en la medida en que este impuesto obliga a vender algunas acciones sólo para Ser el impuesto! Desalienta la propiedad.)
Algunas de las desventajas de emitir acciones son:
El pasivo por impuestos diferidos si las acciones se compran por debajo de FMV (si puede averiguar qué es el FMV - recuerde, estas acciones son muy restrictivas y valen menos que las adquiridas por ángeles y otros inversionistas.) posibilidad.
Puede necesitar defender el FMV. Puede necesitar una valoración independiente. Nunca había oído hablar de esto.
Necesidad de asegurarse de que las disposiciones de acuerdo con los accionistas están en su lugar (por ejemplo, la adquisición, votación, etc).
La emisión de acciones a precios muy bajos en una tabla de límite puede parecer mala para los nuevos inversores (mientras que los ejercicios de opciones se consideran normales)
Más accionistas para gestionar
Los beneficios de poseer acciones son:
Puede obtener hasta $ 750,000 en ganancias de capital libre de impuestos de por vida
Deducción del 50% sobre las ganancias si las acciones se mantienen durante más de 2 años O si las acciones emitidas en la fecha de
Las pérdidas en un CCPC se pueden utilizar como pérdidas de negocio permitidas (si el negocio falla)
Puede participar en la propiedad de la empresa - votación, dividendos, etc
Menos dilución que si se emiten opciones sobre acciones
Obtención de acciones baratas en manos de los empleados es la mejor manera de ir a un CCPC. El único riesgo a la baja surge si la empresa falla en menos de dos años. (Ver la línea inferior abajo).
[NOTA: Las compañías pueden emitir acciones (en lugar de opciones) a los empleados a cualquier precio y no desencadenar un evento imponible inmediato - es lo mismo que dar una concesión de opción que se ejerce inmediatamente. Si las acciones (en lugar de opciones) se otorgan a un precio muy bajo (por ejemplo, cero), se pueden emitir menos acciones que al otorgar opciones con un precio de ejercicio más alto.]
Para evitar el riesgo de tener que pagar el impuesto sobre el beneficio diferido si las acciones se emiten a un empleado por debajo del VFM, a menudo se otorgan opciones. Esto sólo es un riesgo si las acciones se venden en última instancia por debajo del VFM, como puede ser el caso en una quiebra. Las opciones sobre acciones, si no se ejercen, evitan este problema potencial. Una opción da a uno el derecho a comprar un cierto número de acciones por un precio declarado (el precio de ejercicio) por un período de tiempo dado. El no es responsabilidad en el momento en que se otorgan las opciones. Sólo en el ejercicio en que se ejerzan las opciones, existe una obligación tributaria. Para las CCPCs, este pasivo puede ser diferido hasta que las acciones sean realmente vendidas. Si las acciones se mantienen por más de 2 años, este pasivo fiscal se calcula al 50% del beneficio. Es decir, un aplazamiento y una deducción del 50% están disponibles para aquellos que han ejercido opciones. (Si las acciones se mantienen por menos de 2 años, una deducción del 50% está disponible si las acciones se adquirieron en FMV).
Algunas desventajas con las opciones de acciones son:
La obligación tributaria (si las opciones se ejercen) nunca se borra - este es exactamente el mismo escenario como si las acciones se dieron.
La exención por ganancias de capital de por vida no puede ser utilizada a menos que las acciones - y no las opciones - se mantengan durante 2 años después del ejercicio. Las plusvalías se calculan sobre la diferencia entre el precio de venta y la JVM cuando se ejercen.
Debe mantener las acciones durante 2 años, después de ejercer la opción de obtener la deducción del 50%. (Si el precio de ejercicio de la opción = FMV en la fecha de la concesión de la opción, una deducción del 50% también está disponible).
El beneficio se considera "ingreso", no una plusvalía y si las acciones se venden posteriormente con pérdida, el beneficio de ingresos no puede ser reducido por esta pérdida de capital.
El riesgo tributario aumenta con el tiempo, ya que es la diferencia entre el VFM y el precio de ejercicio en el momento del ejercicio que establece el pasivo fiscal contingente, por lo que cuanto más tiempo se espera para ejercer (suponiendo un FMV cada vez mayor), mayor será el posible pasivo fiscal.
Las opciones no constituyen propiedad; Las acciones con opción de compra no pueden ser votadas.
Los inversores consideran que los grandes grupos de opciones son negativamente considerados porque pueden provocar una importante dilución en el futuro (a diferencia de las empresas públicas que generalmente se limitan al 10% de las opciones, las empresas privadas pueden tener grandes grupos de opciones).
Todavía necesita tener un FMV defendible; Pueden necesitar una valoración independiente. Puede convertirse en un verdadero dolor de cabeza si CRA requiere que esto se haga retroactivamente cuando se logra una salida.
Podrían expirar demasiado pronto. Puede necesitar tener un término muy largo, digamos 10 años o más.
El mostrar un montón de opciones de acciones en la tabla de capitalización de la compañía impacta directamente (negativamente) la valoración por acción en las financiaciones en curso, ya que los inversores siempre consideran todas las opciones pendientes como acciones en circulación.
Algunos beneficios con opciones sobre acciones son:
No hay obligación tributaria cuando se reciben opciones, sólo cuando se ejercen.
No se requiere desembolso de efectivo hasta que se ejerza e incluso entonces, puede ser mínimo.
Puede ejercer opciones para comprar acciones inmediatamente a precios reducidos sin tener que pagar ningún impuesto hasta que las acciones sean vendidas. Un ejercicio temprano evita una mayor FMV, y por lo tanto evita un mayor beneficio imponible, más tarde.
Desde el punto de vista de la empresa, la concesión de acciones (en lugar de opciones) a un precio muy bajo significa que deben emitirse menos acciones, lo que es bueno para todos los accionistas. Por ejemplo, dar acciones a un centavo en lugar de conceder opciones ejercibles a 50 centavos significa que se deben otorgar más opciones, lo que significa una mayor dilución más tarde, cuando se realiza una salida. El extra de 49 centavos no hace mucho para los accionistas ya que la cantidad de ejercicio para entonces es nominal en comparación con el valor de salida. ¡Esa cantidad volverá al nuevo dueño de la compañía mientras diluyen a todos los accionistas que participan en la salida!
Elemento de acción para los inversores: compruebe la tabla de tapas de su empresa para obtener opciones y deshágase de ellos. En su lugar, las acciones son iguales al valor Black-Scholes de la opción. Por ejemplo, Joe Blow tiene una opción para comprar acciones de 100K a 60 centavos. Las acciones se valoran actualmente en 75 centavos (basado en inversiones recientes). El valor de las opciones se determina que es 35 centavos (es decir, $ 35K en valor total). Los 35 centavos se basan en el valor de la opción (digamos 20 centavos) más la cantidad en el dinero de 15 centavos. Como regla general, cuando se emite una opción con un precio de ejercicio igual al precio actual de la acción, se toma una determinación aproximada del valor de las opciones dividiendo el precio por 3, que en este ejemplo es 60/3 = 20 centavos. Ahora, tome el valor total de $ 35K y emita 46.666 acciones por $ 1.00 (porque 46.666 acciones a 75 centavos = $ 35K). ¡Esto es mejor que demostrar las partes 100K como opciones en la tabla del casquillo !!
RECOMENDACIÓN DE LAS CCPC:
Las opciones de compra de acciones, que pueden ser ejercidas a un costo nominal, dicen 1 centavo - bueno por lo menos 10 años o más.
Sugiera que los titulares de opciones ejercen su opción y compran acciones inmediatamente (simplemente salte el paso # 1 por completo)
Asegúrese de que los concesionarios entienden que si ejercen temprano o inmediatamente, comienzan el reloj de 2 años en la deducción y también obtienen la exención de ganancias de capital de por vida. (Ellos también deben entender que puede haber un posible inconveniente al hacerlo, es decir, la responsabilidad sobre el beneficio cuando se ejerzan las opciones sigue siendo imponible incluso si la empresa falla en la que Pueden reclamar la compensación ABIL. Los concesionarios pueden optar por compensar esta responsabilidad potencial mediante la pérdida de la deducción y la exención y no ejercer hasta que haya una salida en cuyo caso no toman ningún riesgo, pero tienen un mucho menor Hasta un 50% menos de beneficio) .:
Un empleado tiene la opción de comprar acciones por un centavo cada una. Las acciones se están vendiendo a los inversionistas por $ 1.00 cada uno (CRA argumentaría que el precio de $ 1.00 es el FMV). Si el empleado ejerce la opción de inmediato y compra acciones, entonces se considera que ha recibido un beneficio de empleo de 99 centavos, que es totalmente imponible como ingreso, pero tanto un DEFERRAL y una DEDUCCIÓN puede estar disponible. Primero, el impuesto sobre este ingreso puede ser diferido hasta que se vendan las acciones (si la empresa falla, se considera que se venden). Las empresas deben presentar T4 resúmenes con CRA (por lo que no se puede ocultar esta venta). En segundo lugar, si las Acciones (y no la Opción) se mantienen durante al menos 2 años, entonces sólo el 50%, es decir, 49,5 centavos se grava como ingreso. La diferencia entre el precio de venta (y el FMV en el momento en que se adquirieron las acciones) se grava como una ganancia de capital que también es elegible para una exención de por vida de $ 750K! Si las acciones se venden por $ 1.00 o más - no hay problema! Pero, si las acciones se venden por menos de $ 1.00, el empleado sigue en el gancho por el 99 centavos (o .495 centavo) beneficio y aunque tendría una pérdida de capital. No se puede utilizar para compensar la responsabilidad. Puede mitigar esto reclamando una Pérdida de Inversión Empresarial Permitida (ABIL). 50% del ABIL se puede reducir para compensar los ingresos de empleo. En este ejemplo, se permitiría 49,5 centavos como una deducción contra los 49,5 centavos que se gravan como ingreso, dejando al empleado en una posición neutral con respecto a la responsabilidad tributaria. Precaución: reclamar un ABIL puede no funcionar si la compañía ha perdido su estado de CCPC en el camino.
(Nota: He oído hablar de personas en esta situación alegando que el FMV es exactamente lo que pagaron, ya que fue negociado a distancia, las acciones no podían ser vendidas, la empresa estaba desesperada, etc, etc Su actitud es dejar CRA lo desafía, eso está bien siempre y cuando la Compañía no haya presentado un T4, como debería, pero probablemente no lo hará si está en quiebra).
Por otro lado, si la empresa tiene éxito, los empleados pueden disfrutar de ganancias libres de impuestos (hasta $ 750K) sin tener que poner mucho capital y tomar sólo un riesgo limitado.
Si el empleado tiene una opción hasta que la empresa se vende (o hasta que las acciones se vuelven líquidas) y luego ejerce la opción y vende inmediatamente las acciones, la ganancia entera del empleado (es decir, la diferencia entre su precio de venta y el centavo que pagó por cada acción ) Está totalmente gravada como ingreso de empleo y no hay deducción del 50% disponible (a menos que el precio de ejercicio de la opción = FMV cuando se otorgó la opción).
LA LÍNEA DE FONDO:
La mejor oferta tanto para la empresa (si es una CCPC) como para sus empleados es emitir acciones a los empleados por un costo nominal, digamos un centavo por acción. Si esta subvención es para obtener el compromiso de un empleado para el trabajo futuro, los términos de inversión inversa deben ser acordados antes de las acciones se emiten. Para determinar el número de acciones, comience por fijar arbitrariamente el precio por acción. Este podría ser el precio más reciente pagado por los inversores independientes o algún otro precio que usted puede argumentar es razonable en las circunstancias. Digamos que el precio por acción es de $ 1.00 y desea darle a su recién contratado CFO un bono de firma de $ 250.000. Por lo tanto, obtendría 250K acciones como un incentivo (estos deben cobrar a diario durante un período de 3 años). Él paga $ 2,500 por éstos. Desde el punto de vista tributario, ahora es responsable del impuesto de $ 247.5K en ingresos de empleo. Sin embargo, puede aplazar el pago de este impuesto hasta que las acciones sean vendidas.
Estos son los posibles resultados y consecuencias:
A) Las acciones se venden por $ 1.00 o más después de haber mantenido las acciones durante al menos 2 años: se grava con un ingreso del 50% de $ 247.5K (es decir, $ 250.000 menos los $ 2.500 pagados por las acciones), es decir, el beneficio diferido, 50% de deducción más una ganancia de capital sobre cualquier producto por encima de su $ 1.00 por acción "costo". Esta ganancia se grava a una tasa del 50% y, si no se ha reclamado previamente, su primer $ 750K en ganancias es totalmente libre de impuestos.
B) Las acciones se venden por $ 1.00 o más pero en menos de 2 años: se grava con un ingreso de $ 247.5K, es decir, el beneficio diferido, ya que no hay deducción disponible MÁS una ganancia de capital sobre cualquier producto por encima de su $ 1.00 por acción ". No se beneficia de la deducción del 50% sobre el beneficio del empleo ni de la deducción del 50% sobre las plusvalías. This is why it makes sense to own shares as soon as possible to start the 2-year clock running.
c)Shares are sold for less than 1.00 after holding the shares for more than 2 years: he is taxed on income of 50% of $247.5K, i. e. the deferred benefit less the 50% deduction. He can offset this tax by claiming an ABIL. He can take 50% of the difference between his selling price and $1.00 and deduct that from his employment income – this is a direct offset to the deferred benefit. If the company fails and the shares are worthless, he is taxed on employment income of 50% of $247,500 MINUS 50% of $250K – i. e. no tax (indeed, a small refund).
d)Shares are sold for less than 1.00 after holding the shares for less than 2 years: he is taxed on income of $247.5K, i. e. the deferred benefit as there is no deduction available. He can offset this tax by claiming an ABIL. He can take 50% of the difference between his selling price and $1.00 and deduct that from his employment income – this is a partial offset to the deferred benefit. If the company fails and the shares are worthless, he is taxed on employment income of $247,500 MINUS 50% of $250K = $122,500. NOT GOOD! This is the situation that must be avoided. Why pay tax on $122.5K of unrealized income that has never seen the light of day? ¿Cómo? Make sure you let 2 years pass before liquidating if at all possible. You can also argue that the benefit was not $247,500 because there was no market for the shares, they were restricted, you could not sell any, etc. Let CRA challenge you and hope they won’t (I’ve not heard of any cases where they have – in the case of CCPCs).
Why bother with options when the benefits of share ownership are so compelling? And the only possible financial risk to an employee getting shares instead of stock options arises in (d) above if shares are sold at a loss in less than 2 years. If the company fails that quickly, the FMV was likely never very high and besides, you can stretch the liquidation date if you need to.
Contractors and Consultants
The deferral of tax liability in respect of CCPCs is granted only to employees of the CCPC in question (or of a CCPC with which the employer CCPC does not deal at arm’s length). Contractors and consultants are not entitled to the benefit of the deferral. Consequently, contractors and consultants will be liable to pay tax upon exercise of any options.
Never underestimate the power of the Canada Revenue Agency. One might expect them to chase after the winners – those with big gains on successful exits but what about the folks that got stock options, deferred the benefit and sold their shares for zip? Will CRA kick the losers when they’re down?
For Publicly Listed Corporations and non-CCPCs
In the case of public companies, stock option rules are different. The main difference is that if an employee exercises an option for shares in a public company, he has an immediate tax liability.
Up until the Federal Budget of March 4th, 2010, it was possible for an employee to defer the tax until he actually sells the shares. But now, when you exercise a stock option and buy shares in the company you work for, CRA wants you to pay tax immediately on any unrealized “paper” profit even if you haven’t sold any shares.
Furthermore, CRA now wants your company to withhold the tax on this artificial profit. This discourages the holding of shares for future gains. If the company is a junior Venture-Exchange listed company, where will it find the cash to pay the tax – especially if it is thinly traded?
This process is not only an accounting nightmare for you and the company – it’s also fundamentally wrong in that CRA is making your buy/sell decisions for you.
It is also wrong in that stock options will no longer be an attractive recruiting inducement. Emerging companies will find it much harder to attract talent.
It will also be a major impediment to private companies that wish to go public. In the going-public process, employees usually exercise their stock options (often to meet regulatory limits on option pools). This could result in a tax bill of millions of dollars to the company. Also, it won’t look good to new investors to see employees selling their shares during an IPO even though they have to.
Before the March 4th budget, you could defer the tax on any paper profit until the year in which you actually sell the shares that you bought and get real cash in hand. This was a big headache for those who bought shares only to see the price of the shares drop.
The stories you may have heard about Nortel or JDS Uniphase employees going broke to pay tax on worthless shares are true. They exercised options when shares were trading north of $100, giving them huge paper profits and substantial tax liabilities. But when the shares tanked, there was never any cash to cover the liability – nor was there any offset to mitigate the pain. The only relief is that the drop in value becomes a capital loss but this can only be applied to offset capital gains. In the meantime, though, the cash amount required to pay CRA can bankrupt you.
CRA argues that the new rule will force you to sell shares right away, thereby avoiding a future loss. (Aren’t you glad that they’re looking after you so well?) But, that’s only because the stupid “deemed benefit” is taxed in the first instance.
Example: You are the CFO of a young tech company that recruited you from Silicon Valley. You have a 5-year option to buy 100,000 shares at $1.00. Near the expiration date, you borrow $100,000 and are now a shareholder. On that date, the shares are worth $11.00. Your tax bill on this is roughly $220,000 (50% inclusion rate X the top marginal tax rate of 44%X $1 million in unrealized profit) which you must pay immediately (and your Company must “withhold” this same amount). Unless you’ve got deep pockets, you’ll have to sell 29,000 shares to cover your costs – 20,000 more than if you did a simple cashless exercise. So much for being an owner! In this example, if the company’s shares drop in price and you later sell the shares for $2.00, you’ll be in the hole $120,000 ($200,000 less $320,000) whereas you should have doubled your money! Sure, you have a capital loss of $9 (i. e. $11 less $2) but when can you ever use that?
As part of the March 4 changes, CRA will let the Nortel-like victims of the past (i. e. those that have used the previously-available deferral election) file a special election that will limit their tax liability to the actual proceeds received, effectively breaking-even but losing any potential upside benefit. I guess this will make people with deferrals pony up sooner. The mechanics of this are still not well defined. (see the paragraph titled “deferrals election” below)
Interestingly, warrants (similar to options) given to investors are NOT taxed until benefits are realized. Options should be the same. Investors get warrants as a bonus for making an equity investment and taking a risk. Employees get options as a bonus for making a sweat-equity investment and taking a risk. Why should they be treated less favorably?
I don’t understand how such punitive measures make their way into our tax system. Surely, no Member of Parliament (MP) woke up one night with a Eureka moment on how the government can screw entrepreneurs and risk takers. Such notions can only come from jealous bureaucrats who can’t identify with Canada’s innovators. What are they thinking?
A common view is that large public corporations, while it creates more accounting work for them, aren’t that upset about this tax. They do see it as a benefit and for them and their employees, it might be better to sell shares, take the profit and run. For smaller emerging companies – especially those listed on the TSX Venture exchange, the situation is different. For one thing, a forced sale into the market can cause a price crash, meaning having to sell even more shares. Managers and Directors of these companies would be seen as insiders bailing out. Not good.
The rules are complex and hard to understand. The differences between CCPCs, non-CCPCs, public companies and companies in transition between being private and non-private give you a headache just trying to understand the various scenarios. Even while writing this article, I talked to various experts who gave me somewhat different interpretations. Does your head hurt yet? What happens if you do this…or if you do that? It’s messy and unnecessary.
The solution: don’t tax artificial stock option “benefits” until shares are sold and profits are realized. For that matter, let’s go all the way and let companies give stock – not stock option – grants to employees.
I wonder how many MPs know about this tax measure? I wonder if any even know about it. It’s a complex matter and not one that affects a large percentage of the population – certainly not something that the press can get too excited about. I’m sure that if they are made aware of it, they’d speak against it. After all, on the innovation front, it’s yet another impediment to economic growth.
For another good article on the subject, please read Jim Fletcher’s piece on the 2010 Budget on BootUp Entrepreneurial Society’s blog.
For those who exercised an option before March 2010, and deferred the benefit, CRA is making a special concession. On the surface it looks simple: You are allowed to file an election that lets you limit your total tax bill to the cash you actually receive when you sell the shares (which will likely leave you with nothing for your hard work) rather than be subject to taxes on income you never realized (as is the case before March 2010). Indeed, CRA thinks it’s doing everyone a big favor because it’s being kind in helping with a mess that it created in the first place!
There’s a detailed and lengthy discussion in an article by Mark Woltersdorf of Fraser Milner Casgrain in “Tax Notes” by CCH Canadian. The key point in the article is that you have until 2015 to decide how to handle any previously deferrals. The decision is not straightforward because it depends on an individual’s specific circumstances. For example, if there are other capital gains that could be offset, filing the election would result in not being able to offset these. The article states: “On filing the election, the employee is deemed to have realized a taxable capital gain equal to one-half of the lesser of the employment income or the capital loss arising on the sale of optioned shares. The deemed taxable capital gain will be offset (partially or in full) by the allowable capital loss arising from the disposition of the optioned share. What is the value of the allowable capital loss that is used, and therefore, not available to offset other taxable capital gains?” The article gives a few good examples to illustrate various scenarios. So, if you’re in this situation – do your analysis. I tried to link to the article, but it’s a pay-for publication, so that’s not available. Your tax accountant might give you a copy.
Thanks to Steve Reed of Manning Elliott in Vancouver for his tax insights and to Jim Fletcher, an active angel investor, for his contributions to this article.
Footnotes (the devil is in the details):
1.”Shares” as referred to herein means “Prescribed Shares” in the Income Tax Act. Generally this means ordinary common shares – BUT – if a Company has a right of first refusal to buy back shares, they may no longer qualify for the same tax treatment.
2.There are really two 50% deductions are available: The regular capital gains deduction which permits a 50% deduction on capital gains made on shares that are acquired at FMV and the 50% deduction available to offset the employment income benefit on shares that are held for more than 2 years. (Of course, only one 50% deduction is available. )
3.CCPC status may unknowingly be forfeited. For example, if a US investor has certain rights whereby he has, or may have, “control”, the company may be deemed to be a non-CCPC.
Rolling LEAP Options
Options are usually seen as tools for the "fast money" crowd. If an option trader can correctly forecast a stock's price within a specific time frame and buy the appropriate option, huge profits can be made in a few months. However, if the prediction is wrong, then the same option could easily expire worthless, wiping out the original investment.
However, options can also be useful for buy-and-hold investors. Since 1990, investors have been able to buy options with expiration dates ranging from nine months to three years into the future. These options are known as LEAP (Long-Term Equity Anticipation Securities) options.
Buying LEAPs Investors can purchase a LEAP call option contracts instead of shares of stock in order to get similar long-term investment benefits with less capital outlay. Substituting a financial derivative for a stock is known as a Stock Replacement strategy, and is used to improve overall capital efficiency.
Rolled LEAPs The biggest problem with options for the buy and hold investor is the short-term nature of the security. And even LEAP options, with expirations over a year, may be too short for the most ardent buy and hold investor.
However, a LEAP option can be replaced by another LEAP with a later expiry. For example, a two-year LEAP call could be held for a single year and then sold and replaced by another two-year option. This could be done for many years, regardless of whether the price of the underlying security goes up or down. Making options a viable choice for buy and hold investors.
Selling older LEAP calls and purchasing new ones in this manner is called the Option Roll Forward. or sometimes just the Roll. An investor makes regular small cash outlays in order to maintain a large leveraged investment position for long periods.
Rolling an option forward is inexpensive, because the investor is selling a similar option with similar characteristics at the same time. However, predicting the exact cost is impossible because option pricing depends upon factors such as volatility. interest rates and dividend yield that can never be precisely forecasted. Using the spread between a two-year and one-year option of the underlying security at the same strike price. is a reasonable proxy.
Using LEAP calls, like any stock-replacement strategy, is most cost-effective for securities with low volatility, such as index or sector ETFs or large-cap financials, and there's always a tradeoff between how much cash is initially put down and the cost of capital for the option. An at-the-money option on a low volatility stock or ETF is generally very inexpensive, while an at-the-money option on a high volatility stock will be significantly more expensive.
Leverage Ratio and Volatility At the money LEAP call options initially have higher leverage and volatility. Minor changes in the market price of the underlying security can result in high percentage changes in the price of the option, and the value may fluctuate by 5% on a typical day. The investor should be prepared for this volatility.
Over periods of years, as the underlying security appreciates and the call option builds equity, the option loses most of its leverage and becomes much less volatile. Given multi-year holding periods, the results of the investment are relatively predictable using statistics and averages.
Note that a $1 increase in the underlying security will not immediately result in a full $1 increase in the LEAP call price. Because options have delta. they receive some appreciation immediately, and then accumulate the remainder as they get closer to expiry. This also makes them more suited for investors with longer holding periods.
Example In this example, we've calculated the implied interest rate and expected return on a deep-in-the-money option on SPY. the S&P 500 Index Fund tracker ETF. We've assumed annual appreciation of 8%, before dividends and will hold the option for five years.
Discounted cash flow calculations can be used to determine both the cost of capital and the expected appreciation.
The annual roll-forward cost is unknown, but we'll use, as a proxy, the cost difference between a December 2007 option and a December 2008 option at the same strike price. It could go up or down next year, but over time, it's expected to decline. The investor will pay the roll-forward cost three times in order to extend the two-year option to a five-year holding period .
Note that in the above example, we excluded dividends. Option holders don't receive dividends, but they do benefit from lower option prices in order to account for the expected future dividend payments. When calculating expected returns for any LEAP, be consistent and either include or exclude dividends from both the cost of capital and the expected appreciation.
The Bottom Line Most buy-and-hold investors and index investors are not aware that LEAP calls can be used as a source of investment debt. Using LEAP call options is more complex than purchasing stock on margin, but the rewards can be a lower cost of capital, higher leverage and no risk of margin calls .
LEAP call options may be purchased and then rolled over for many years, which allows the underlying security to continue to compound as the investor pays the roll forward costs. If the option is deep-in-the-money and the underlying security has low volatility, then the cost of capital will be low.
LEAP calls can give investors the ability to construct long-term portfolios of stocks or index ETFs and thereby control larger investments with less capital. In the above example, an investor could control a $143,810 index portfolio for a $31,600 initial payment.
Of course, it's always important to plan purchases, sales and future roll-forward costs carefully, as exiting a large leveraged investment during a downturn will most likely lead to significant losses. Despite the fact that many option buyers are short-term hedgers or speculators, an argument could be made that leveraged investments are only appropriate for investors with very long horizons.
Mutual Funds & ETFs
Despite geopolitical challenges, Europe’s economic strength is vast – ETFs provide interesting options for investors to increase equity exposure.
Mutual Funds & ETFs
Discover 5 ETFs that investors might use to obtain exposure to portions of the U. S. stock market.
Identify some of the biggest consumer discretionary holdings in the S&P 500 exchange-traded fund (ETF): Amazon. com, Home Depot and Disney.
Mutual Funds & ETFs
Learn about how the history of the SPDR S&P 500 ETF and how it is managed. Discover the top five stock positions held within the fund.
Based on the charts discussed in this article, the utilities sector could be the place for investors looking to make a profit.
Japanese, European and Chinese markets still look weak. Here's what you need to know about these ETFs.
Mutual Funds & ETFs
Take a look inside the KBE S&P Bank SPDR ETF and obtain an overview of the companies that comprise its top five portfolio holdings.
Mutual Funds & ETFs
Compare a popular telecommunications industry exchange-traded fund (ETF) to a similar mutual fund, and see which one comes out on top in the final analysis.
Products and Investments
Here's why becoming an expert in ETF offerings can benefit advisors looking to add more wealthy clients to their roster.
Mutual Funds & ETFs
Learn about the iShares Global Technology ETF and its portfolio's top five holdings, which are Apple, Microsoft, Facebook, Alphabet and Intel.
Leveraged ETFs often advertise their volatility versus a tracked index with the multiple included in the name of the fund. Leer respuesta completa >>
A mutual fund is purchased and sold in a direct transition between the investor and the fund company. Since there is no middleman. Leer respuesta completa >>
Un derivado es un contrato entre dos o más partes cuyo valor se basa en un activo financiero subyacente acordado. Leer respuesta completa >>
After-hours trading (AHT) refers to the buying and selling of securities on major exchanges outside of specified regular. Leer respuesta completa >>
Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. De hecho. Leer respuesta completa >>
Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering. Leer respuesta completa >>
An account that can be found in the assets portion of a company's balance sheet. Goodwill can often arise when one company.
An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such.
A derivative contract through which two parties exchange financial instruments. Estos instrumentos pueden ser casi cualquier cosa.
Learn what EBITDA is, watch a short video to learn more and with further reading we teach you how to calculate it using MS.
Net Present Value (NPV) is the difference between the present values of cash inflows and outflows. Se utiliza en el presupuesto de capital.
Do Stock Options Terminate With Employment?
Employment Options for Seniors
What to Do When a Company's Maternity Leave Pay Is Insufficient?
What Happens to Employee Stock in a Buyout?
What Is the Role of a Stock Broker?
Options Available to an Employee Who Believes There Was Wrongful Termination
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Stock Option Fundamentals: Vesting and Expiration
You cannot cash in your stock options immediately. The options must first be vested, and you don't own them forever.
Vesting in public company stock grants means that before you can exercise stock options, you must satisfy a requirement of some kind. Most commonly, you must work at a company for a certain length of time. When the options do vest, it's usually wise to refrain from immediately exercising the stock options and selling the shares, because of their tax-deferred earning potential over time.
It's essential that you understand the vesting and expiration provisions of each stock option grant.
Once an option expires, however, you lose the right to exercise it. That's why it's essential that you understand the vesting and expiration provisions of each stock option grant so that you take full advantage of your options (or at least don't forfeit their value).
Vesting Arrangements: The Golden Handcuffs
Widely Accepted Time-Vesting Approach A traditional vesting arrangement specifies the amount of time that must pass between the option grant and the time when you can exercise the options. Vesting also applies to restricted stock, with ownership of the shares passing to you based on when they vest. Vesting schedules vary and will be detailed in your option grant agreement. Even within a single company, there can be separate vesting criteria for different options grants, for distinct levels of participants receiving the same grant, and for nonqualified stock option (NQSO) and incentive stock option (ISO) grants.
Options typically vest in equal installments over several years. That is, none of the options vest immediately upon grant, but a certain percentage will vest at given times in the future. For example, it is common for options to fully vest within three to five years (20% to 33% per year), with the first vesting point at one year. Suppose that in December of last year you received a grant of 1,200 stock options that vests in three equal installments. You would be able to exercise one-third (400) of those options in December of this year, two-thirds (800) on the second anniversary of the grant date, and then 100% (1,200) on the third anniversary.
Some companies use cliff vesting, which means that all or a large portion of the options vest at once. For example, none of the 1,200 options you received last December would vest until the third anniversary of the grant date.
Acceleration of vesting is the normal response to events such as a change of corporate control or an employee's death or disability.
Variations in Vesting Approach Since companies want the vesting schedule to work as a retention incentive (known as "golden handcuffs"), the schedule may vary under certain circumstances. Some companies allow monthly or even daily vesting after the initial annual installment vests. Acceleration of vesting is the normal response to events such as a change of corporate control or an employee's death or disability. Your stock option agreement will explain the rules for this. Terms of acceleration are rarely negotiated on an individual basis. Relatively new and pertaining mostly to senior executives is performance-based vesting, in which options vest only if the company meets certain performance criteria within a specified time. For example, a senior executive's option grant might be 40% vested if annual earnings per share reach or exceed the 20% mark by a certain date.
Another type of performance-based award accelerates the vesting schedule. The vesting period is shortened if the stock price increases to a specified percentage over the option price, for a specified number of days (e. g. between 25% and 75% for 30 days).
Expiration of Options There is only one valid reason for letting options expire: The stock's market price has sunk below the exercise price, rendering the options worthless and thus underwater. So heads up! All company stock options will eventually expire. Don't let apathy or forgetfulness keep you from taking advantage of this important wealth-building opportunity.
Companies are not obliged to notify you when expiration approaches.
Ten years is the most common life span of an option. Expiration rules vary from company to company and even from grant to grant. Companies are not obliged to notify you when expiration approaches.
Special rules on expiration apply when an employee becomes "inactive" during the option term, by resigning, retiring, becoming disabled, or dying. But when you leave the company for other reasons, expect only the vested options to be exercisable, and for only a short time. They may even expire the day you leave. Any unvested options will expire when employment ends.
Check your stock option agreement and plan to make sure you understand what will happen to your options in these circumstances. The recent survey of stock plan design by the National Association of Stock Plan Professionals provides useful comparative data on companies' practices.
Some stock option plans require immediate expiration of options the day after you leave if you go to work for a competitor. Also be aware that some companies include "clawback" provisions in their stock option plans and can recoup option gains from employees who leave to work for a competitor. Discharge for cause usually results in forfeiture of all options (even vested options) at termination. On the other hand, employees who stay with the company until retirement might be rewarded with acceleration of vesting and additional time to exercise their options. Whatever the reasons for terminating employment, the time during which options may be exercised cannot extend beyond the expiration date set for each grant without the company taking an accounting charge.
Only $100,000 of ISOs from all your grants can become exercisable (vested) in any one calendar year.
Restrictions Differ for Type of Option Companies have lots of freedom in structuring NQSO plans. There are no ISO-like vesting or option-term restrictions that apply to issues of NQSOs. But because ISOs receive favorable tax treatment, the tax code places a number of requirements on ISO terms, including on the vesting and exercise period. Only $100,000 of ISOs from all your grants can become exercisable (vested) in any one calendar year. The number of eligible ISOs is calculated separately for each grant. Multiply the number of options granted by the fair market value of the underlying stock on the grant date, then add together the totals for individual grants exercisable in each year. Any options whose annual vested value exceeds $100,000 in one year are considered NQSOs.
Not to worry, though. It's your company's responsibility to do the math at the time of grant. But watch out for circumstances that might put you over the $100,000 limit. Of concern would be acceleration of ISO vesting that arises out of termination of employment due to disability or death, a change of corporate control, or an option repricing program based on out-of-the money options. Each of these situations could result in having some of your existing ISOs converted to NQSOs.
The expiration rules also differ for ISOs. The term for an ISO is always 10 years, and ISOs must be exercised within 90 days following your termination of employment to maintain ISO status. An exception is made for disability or death, in which case the exercise period is extended to one year following the event.
Marilyn Renninger is Chief Knowledge Officer of AMG National Trust Bank, a leading provider of financial advisory services to corporate employees and wealthy individuals. Este artículo fue publicado únicamente por su contenido y calidad. Neither Marilyn nor her firm compensated myStockOptions. com in exchange for publication of this article.
The details of your specific plan are available through your company's plan documents, which are available online at www. netbenefits. com .
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ISOs: AMT Advanced
Refundable AMT Credit: The Calculation
Editor's Note: The tax-code provision for refundable AMT credits was not extended by the American Taxpayer Relief Act of 2012. Therefore, the refundable AMT credit became unavailable after 2012. Unless the rules are extended, AMT credits created in 2009 or later are not eligible for the refundable AMT credit.
On this topic, myStockOptions. com is delighted to have the following contribution by Kaye Thomas, author of the book Consider Your Options , available from Fairmark Press. His two articles (see also the first article ) give complete coverage of the refundable AMT credit, which provides a way for many people to use more of the AMT credit than under the regular rules. For an update by Kaye Thomas on the AMT credit after ATRA, see Last Call For Refundable AMT Credit at Fairmark. com.
Preliminary: Abatement Of Unpaid AMT
The tech stock collapse that began in 2000 left some people with AMT liabilities far beyond their ability to pay. Some of them had to deal with IRS collection efforts over a number of years. The original version of the refundable AMT credit did little to remedy this situation. Someone who owed $1,000,000 to the IRS might qualify for a credit of $200,000 or less. The IRS would apply that credit against the amount owed and continue trying to collect the remaining amount. The new version does away with that problem.
The law says that if, as of October 3, 2008, you owed AMT as a result of exercising an incentive stock option (ISO) in 2007 or any prior year, the tax is abated. That means you don't have to pay it. The tax is wiped off the slate. You don't have to pay interest or penalties relating to that unpaid tax, either. It's as if you never owed it.
This relief doesn't extend to AMT you might owe for any reason other than exercising an incentive stock option. Even if your unpaid AMT relates to a "timing adjustment" (the kind of adjustment that allows you to claim AMT credit later), tax abatement doesn't apply unless it was the specific timing adjustment that applies when you exercise an ISO and hold the stock after the end of the year of exercise.
Naturally, if you escaped having to pay AMT as a result of this provision, you can't claim a credit for this unpaid tax.
It isn't at all clear why Congress extended this provision to unpaid tax from 2007. People who paid AMT for that year aren't allowed to claim a refund. They have to wait until they're able to claim the AMT credit, something that may not occur for several years. Meanwhile, someone who didn't pay the tax got off scot-free, regardless of whether their nonpayment was due to hardship or forgetfulness or even outright cheating. We've seen some bitter complaints about this from people who paid their tax in 2007 or other recent years.
Step 1: Available AMT Credit
The first step in determining the amount of AMT credit you can claim is to determine the amount of available AMT credit. This is your starting point under the normal rule for claiming AMT credit, and also under the refundable AMT credit, which is available to certain people who have long-term unused minimum tax credit. Alert: This section describes how to determine the amount of available AMT credit, but this is not necessarily the amount of credit you'll actually claim. This is just one step in the process of determining how much credit you can claim under either the normal AMT credit or the refundable AMT credit.
Two Kinds Of Adjustments
Broadly speaking, when you pay AMT it is because of certain items that receive different treatment under the AMT rules. For example, if you claim itemized deductions you're allowed to deduct state and local taxes. This deduction isn't allowed under the AMT rules, so a deduction for this item may cause you to pay AMT.
The AMT rules don't always completely disallow a tax benefit. Sometimes they change the treatment so that income reported in one year under the regular tax rules is reported in a different year under the AMT rules. For example, the profit from exercising an incentive stock option may be taxed in the year you exercise the option under the AMT rules, but in a different year when you sell the stock under the regular income tax rules. Items that can end up in different years under the AMT rules are called timing items .
Without the AMT credit, the income from timing items could end up being taxed twice: first under the AMT, and in a later year under the regular tax rules. The AMT credit is designed to prevent this result, so it is allowed only for the part of your AMT payment attributable to timing items. Any portion of your AMT payment that relates to other items (such as the itemized deduction for state and local taxes) is not eligible for later recovery as AMT credit.
How The Calculation Works
In essence, the AMT functions as a parallel tax system in which we determine how much tax you would have paid if a different set of rules applied to your income. When we determine how much of your AMT is eligible to be used as a credit in later years, we actually do another parallel calculation under a third set of rules: the AMT rules without the timing items. This tells us how much AMT you would have paid without the timing items.
We compare the outcome of this calculation with the actual amount of AMT paid for the year in question. If the actual AMT is greater than the calculation without the timing items, we know the additional amount is due to the timing items.
In practice, this calculation appears on Form 8801 for the year after you paid AMT. The IRS hasn't taken my suggestion to calculate this number in the same year you pay AMT. Calculating it on the following year's form can create problems for people who change their filing status. For example, two unmarried individuals may both pay AMT in one year and then file jointly the following year. Form 8801 will not provide the correct result in this situation.
Apart from this glitch, and the mind-boggling complexity of the overall process, this method of calculation is generally favorable to the taxpayer. Calculating the available credit this way maximizes the amount that's considered attributable to timing adjustments, and therefore eligible for later recovery as AMT credit. Example: You pay $8,000 of AMT for a year in which you have a $20,000 adjustment from exercising an incentive stock option and a total of $20,000 in other adjustments. It might seem logical that only half of the $8,000 payment would qualify for later use as AMT credit. However, the calculation described above shows that you would have paid $2,400 in AMT without the timing item from the option. That means the amount available to be claimed as AMT credit in later years will include $5,600 from this year.
Available AMT credit that isn't used or otherwise absorbed will carry over to the following year. In effect, your available AMT credit for any given year is the amount created in the preceding year (as a result of paying AMT that year) plus any amount carried over from earlier years.
Using This Number
You can claim available AMT credit under the normal rules to the extent your regular income tax exceeds the tax calculated under the AMT rules. To claim the refundable AMT credit you need to continue with a more complicated calculation, where the next step is to determine how much of your available AMT credit qualifies as long-term unused minimum tax credit.
Step 2: Long-Term Unused Minimum Tax Credit
One of the requirements to use the refundable AMT credit is to have available AMT credit that is old enough to qualify as long-term unused minimum tax credit . Applying this rule is the second step in the process of determining how much refundable credit you can claim.
Long-Term Unused Minimum Tax Credit
You can't use the refundable AMT credit to recover AMT you paid last year or the year before. It allows recovery only if you have unrecovered credit from years that are more than three years earlier. The first year this provision applied was 2007 (returns filed in 2008), and for that year you were potentially able to use this rule to recover AMT paid for any year up to and including 2003 (returns filed in 2004). If you have unused credit for more recent years, you'll have to either recover it under the normal rule or wait until the credit ages enough to be recoverable under this rule.
First In, First Out
There are people who pay AMT in some years and recover AMT credit in other years. Some people intentionally create this situation, believing it produces a more efficient use of the AMT credit. (I've seen this strategy recommended by experts, but generally it's a poor strategy. As Fermat once said, the proof is too long for me to provide it here.) In any event, an alternation between paying AMT and using the credit raises a question about whether the remaining credit pertains to the older years or the more recent ones. The answer is supplied by the first-in, first-out rule, or FIFO. This rule says that whenever you use AMT credit, you're treated as using the oldest credit.
On its face this seems like a plausible enough rule, but it can have unexpected consequences. Example: You paid $100,000 AMT on the exercise of an ISO in 2000 but didn't recover any of this amount as credit after the stock price collapsed. In 2006 you again paid $100,000 AMT on exercise of an ISO and this time you had better luck: you recovered the full amount when you sold the stock for a profit in 2007. You still have $100,000 of unused AMT credit because of what happened in 2000.
Your ability to claim AMT credit in 2007 related directly to the sale of stock that produced AMT liability in 2006, so it seems fair that you should be able to treat the remaining amount as long-term unused minimum tax credit. The law provides otherwise. You're treated as having used the credit from 2000, and you're left with credit from 2006, which won't qualify as long-term unused minimum tax credit until 2010.
Using This Number
If you have long-term unused minimum tax credit, the next step is to use this number in determining the tentative refundable credit.
Step 3: Tentative Refundable Credit
Once you've determined your long-term unused minimum tax credit you can use that number to determine the tentative refundable credit. This is the amount of refundable AMT credit you're allowed to claim, subject to coordination with the regular AMT credit.
Determining The Tentative Refundable Credit
Your refundable credit base amount can never be larger than your long-term unused minimum tax credit. Subject to that restriction, it's the largest of these numbers:
50% of long-term unused minimum tax credit
the previous year's tentative refundable credit, without regard to the phaseout rule that applied to refundable AMT credit claimed on 2007 tax returns.
In addition, if you paid interest or penalties as a result of owing AMT on the exercise of an incentive stock option for any year before 2008, your tentative refundable credit is increased by half that amount for the years 2009 and 2010, allowing you to recover that amount over a period of two years.
This is one of the provisions that has caused heartburn for people who paid their tax on time. Some of them took out second mortgages or incurred other costs to come up with the money to pay the tax, and there's no way for them to recover those costs. Yet people who didn't pay when the tax was due avoid paying even the relatively low interest rates that apply to unpaid income tax.
$5,000 Floor Eliminated
The version of the refundable credit that applied to 2007 allowed only 20% per year but with a $5,000 floor. Someone whose long-term unused minimum tax credit was $12,000, for example, would expect to recover $5,000 in 2007, another $5,000 in 2008, and the last $2,000 in 2009. The new version, for years 2008 and later, raises the percentage from 20% to 50%. It eliminates the $5,000 floor, but says you can claim the same amount as the previous year (without regard to the income phaseout). Because of this lookback, anyone who used the $5,000 floor on a 2007 tax return will get the benefit of that floor in subsequent years. In the example earlier in this paragraph, the schedule for recovering the credit will remain unchanged, even though $5,000 is more than 50% of the credit that remains unused in 2008.
There is one narrow group of taxpayers who lose out from the elimination of the $5,000 floor. Suppose you're claiming the refundable credit for the first time in 2008 because your unused credit wasn't old enough in 2007 to qualify for this benefit. You can claim only 50% of the credit in 2008, even if the result is that you claim less than $5,000 for the year. Under the old version of the rule you would have been able to claim at least $5,000 for 2008.
Using This Number
The phaseout rule that applied to higher-income taxpayers for 2007 has been repealed, so there's just one more step in determining your refundable credit: coordination with the regular AMT credit. Editor's Note: If you need to calculate the credit for the tax year 2007, see Kaye's discussion of this on Fairmark. com.
Step 4: Coordination With Regular AMT Credit
The previous steps in this calculation yield a number the IRS calls the tentative refundable credit. This number is tentative in the sense that it will be reduced to the extent you're able to claim the regular AMT credit in the same year. If your regular AMT credit is larger than your tentative refundable credit, you won't receive any refundable credit at all. This means the total amount of AMT credit you can claim in a given year is equal to the regular AMT credit or the tentative refundable credit, whichever is larger. You aren't allowed to add them together. Example: This year your regular income tax is $3,000 greater than your tax as calculated under the AMT rules, so you're allowed to claim $3,000 of AMT credit under the regular rule. Your tentative refundable credit is $7,000. In this situation, you'll claim a total of $7,000 in AMT credit for this year. You won't be allowed to add these amounts together and claim $10,000.
Regular Rule Recovers More Recent Tax
This rule will apply even in a situation where your ability to claim the regular AMT credit relates to AMT paid in more recent years. In the example above, you may have had $35,000 in long-term unused minimum tax credit and another $5,000 in available AMT credit from exercising an incentive stock option in the most recent year. Your recovery of $3,000 under the regular AMT credit results from a sale of the stock you acquired last year. It might seem fair to allow both credits in this situation, permitting you to recover the full amount of the long-term credit within five years. Unfortunately, the law treats the $3,000 that's available under the regular AMT credit as if it comes from the long-term unused minimum tax credit.
For technical reasons, refundable credits appear in a different place on your tax return than other credits. In the example above, you would report a regular AMT credit of $3,000 and a refundable AMT credit of $4,000. The total amount claimed is equal to the tentative refundable credit (the larger of the two amounts), but that total is split between two different lines of the return.
If your return shows a smaller refundable credit than you expected, check to see if this is because you're receiving part of your overall AMT credit for the year under the regular rule.
Using This Number
The key point about the final number in this calculation is that it is refundable. This means it can be used against regular income tax or against AMT, and you can receive a check from the IRS reflecting the full amount even if the result is a refund that exceeds the total amount of tax you paid for the year.
Kaye Thomas is author of Consider Your Options: Get The Most From Your Equity Compensation , a plain-language guide to handling stock options and other forms of equity compensation. Consider Your Options is available from Fairmark Press. a leading independent online publisher of tax guidance on a wide range of topics, including stock options, IRAs, capital gains, and college savings. Este artículo fue publicado únicamente por su contenido y calidad. Neither the author nor his firm compensated us in exchange for its publication.
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Pinterest just made a deal with employees that could rock the startup world
Last week, Pinterest made a huge change that will allow its employees to collect equity on terms more favorable to them, Fortune's Dan Primack reports .
The digital pinboard company will let employees who leave after at least two years of service retain their vested stock options for an additional seven years without exercising them.
This is rare for startups and could be a huge boon to startup employees if other big private companies follow suit.
Typically, startup employees give up higher salaries in favor of taking stock options.
The hope here is that when the startup they work for becomes super successful, those stock options will be worth more than their lost salary, and the employees will cash in on their company's success as it grows.
But there's a catch: Employees who leave companies are usually given 90 days to exercise those options. That means the employee has to buy the options at the "strike price" — the stock price at the time when the options were granted.
The employee may also have to pay taxes on the value of the exercised options. (This gets confusing, as there are different kinds of options, and some of those taxes can sometimes be refunded in later years — read up on the Alternative Minimum Tax and incentive stock options if you're interested in the details.)
If the company is public, this isn't a huge problem. The employee can just sell some newly exercised shares at the market price — which is presumably higher than the strike price (or the shares aren't worth exercising) — then take that money and use it to buy the rest of the shares and pay taxes.
So, for instance, an employee who is granted 10,000 shares might be able to sell 1,000 to pay for exercising those shares and 500 for the tax bill and still end up with a nice 8,500 shares.
But what if the company is still private, as is increasingly the case with the hottest tech companies?
Then, unless the company is willing to buy back those shares or willing to let the employee sell them on the secondary market, the employee has to pay cash, up front, to exercise those shares. Then the employee has to pay more to the IRS.
Companies usually give employees a short window to exercise, something like 60 or 90 days. If you're too cash-strapped to buy those shares and pay taxes during that window, too bad. No stock for you, no matter how long you were at the company and how many options you were granted.
Pinterest is giving employees a much longer time — seven years — to come up with the money to buy unexercised options.
That effectively makes those options a lot more valuable as compensation, as nearly every employee will be able to exercise them — especially if the company goes public during that time, and employees can sell some shares to cover the cost of exercising them.
If other companies follow suit, this could change the entire landscape for startups, making it easier for them to attract and retain employees.
SEE ALSO: Broken cap tables — why startups aren't tracking stock ownership properly
How to know when it’s time to exercise your stock options
Say you’re lucky enough to work at a newly public company that passes out stock options like candy. Felicitaciones. Or maybe you work at an old-fashioned profit-making enterprise that has awarded you stock options for superior performance. Either way, you have to decide when to exercise your options.
Like most important things in life, the decision is a judgment call. By exercising now, you can potentially reduce your overall tax bill. But you will also have an immediate tax cost. Plus, you run the risk that the stock will dive while you are hanging on to it. Here’s how to evaluate the pros and cons.
Gunning for long-term capital gain treatment
By exercising your options sooner rather than later, you improve the chances that you’ll qualify for favorable long-term capital gain tax treatment when you sell your shares.
If your options are the nonqualified kind (NQSOs), exercising and holding the shares over a year means all your post-exercise appreciation would qualify for the 15% or 20% long-term capital gains rate -- or even 0% if your 2016 taxable income (including the gains) is $75,300 or less ($37,650 for singles). For the more-than-one-year rule, start counting on the day after you receive the shares and count the day you sell. In contrast, when you sell after a shorter ownership period, post-exercise gains are taxed at your ordinary rate, which could be as high as 39.6%.
If you have incentive stock options (ISOs), the rules are stricter. To get favorable long-term capital gain treatment, you must sell the shares more than two years after the option grant date and have owned them for over a year (starting with the day after the exercise date). If you pass these tests, your entire profit -- the difference between the sale and exercise prices -- is taxed at no more than 15% or 20%. ¡Sí! Note that higher-income folks may also owe the 3.8% Medicare surtax on net investment income on top of the “regular” income tax hit.
You can clearly see the tax advantage of exercising right now if you think the shares will go up and you expect to hold on long enough to take your profits in the form of long-term capital gains.
The other side of the coin
Despite the tax advantage, exercising right now is not a no-brainer.
First, you need money. If you borrow it, you’ll owe interest. If you use your own, you’ll give up what you would otherwise have earned on that money.
Second, bad tax things can happen on the exercise date. With an NQSO, the spread (difference between exercise price and market price on the date of exercise) is taxed as salary. That means you get taxed at your regular rate (which can be as high as 39.6%), plus you owe those ever-popular Social Security and Medicare taxes, too (at a rate of 1.45% or 2.35% or 7.65%, depending on how much you’ve earned by the time you exercise). Of course, this is not a big deal if you can exercise when there is little or no spread. However, your option-vesting schedule may prevent you from doing so.
With an ISO, you won’t owe any “regular” income tax or any Social Security or Medicare tax when you exercise. However, the spread is treated as income for alternative minimum tax (AMT) purposes. That could throw you into the AMT-paying mode. If so, you’ll join a large class of unhappy taxpayers. Granted, you will probably generate an “AMT credit” that you can use in later years to lower your regular tax. But that’s small comfort. Again, this concern is mitigated if you can exercise when there is little or no spread.
Third, other bad tax things can happen after the exercise date. What if the stock declines? In the case of NQSO shares, selling for less than the market price at the time you exercised means a capital loss. Lo siento por eso. If you have other capital gains for the year, you can at least cut your tax bill by taking the loss against your profits. If not, you can write off up to $3,000 against your salary ($1,500 if you are married and file separately). Any excess loss won’t help your tax situation until future years.
Waiting until the last minute
Given all the potential negative outcomes of an early option exercise, I advocate the last-minute strategy. The last minute is when the stock has risen to the point where you are ready to unload — or just before the option expiration date, whichever comes first. Now you can exercise without any qualms. The tax cost, though, will be higher (possibly much higher). However, the additional taxes could be wholly or partially offset by earnings reaped from the money you didn’t spend on exercising early.
Of course, you could follow this advice and see your company’s stock appreciate 300% over the next two years. Then you’ll blame me for all the extra taxes. Go ahead, but remember this: lottery winners have to pay taxes at regular rates, too, so don’t expect any sympathy from your neighbors.
This story has been updated.
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What Are Vesting Schedules?
(LifeWire) - Your employer might be very generous with contributions to your retirement plan or to your stock option plan. But you don't really own those benefits until you have complied with its vesting schedule.
"Vesting" refers to your portion of ownership in the money that has been given to you.
By law and by definition, you are always 100% vested in any money you contribute directly to your own retirement plan.
To encourage your loyalty, employers can make their contributions to your account subject to vesting schedules, which means they can dangle their contributions in front of you like a carrot -- the more years you work, the more of their contributions you get to keep.
Vesting Schedules for Retirement Accounts
Vesting schedules come in three basic types:
Immediate vesting: Just as the name implies, employees with this type of vesting plan gain 100% ownership of their employer's matching money as soon as it lands in their accounts.
Cliff vesting: Cliff vesting plans transfer 100% ownership to the employee in one big chunk after a specific period of service. Workers have no right to any of their matching contributions if they leave before that period expires. But the day they reach the landmark date, they own it all.
Federal law puts a three-year limit on cliff vesting schedules in qualified retirement plans, such as a 401(k) or a 403(b).
Graded vesting: Graded vesting gives employees gradually increasing ownership of matching contributions as their length of service increases, resulting in 100% ownership.
For example, a five-year graded vesting schedule might grant 20% ownership after the first year, then 20% more each year until employees gain full ownership after five years. If they leave before five years are up, they get to keep only the percentage of their employer's matching contributions in which they are vested.
Federal law sets a six-year maximum on graded vesting schedules in retirement plans.
Stock options give employees the right to buy company stock at a set price, regardless of the stock's current market value. The hope is that the stock's market price will rise above the set price before the option is used, giving the employee a chance at a quick profit.
Stock option plans can come with any of the basic forms of vesting. In a cliff plan, all of the options offered to an employee become operable on the same date. In a graded plan, employees are allowed to exercise only a portion of their options at a time.
If employees, for example, are granted options on 100 shares with a five-year cliff vesting schedule, they must work for the company for five more years before they can exercise any of the options to buy shares. In a five-year graded schedule, they might be able to buy 20 shares per year until they reach 100 shares in the fifth year.
Because most stock option grants are not part of an employee's retirement plan, their vesting schedules are not limited by the same federal rules that govern matching contributions.
LifeWire, a part of The New York Times Company, provides original and syndicated online lifestyle content. David Fisher is a freelance writer based in Bend, Ore. In addition to 25 years as a writer and editor, he has worked as a professional financial adviser.
Tip 6 - The 10K Strategy
The 10K Strategy is my favorite investment strategy. I have used it to make an average of over 50% a year for three out of four consecutive years. I have now added a twist to the strategy so that annual returns might be less than those years but there should be a much higher likelihood of its succeeding.
I got so excited about the strategy that I wrote a book about it (see special offer below). I set up an actual portfolio to demonstrate how the strategy worked for my subscribers in March 2009. I called it the Boomer’s Revenge portfolio (designed so Baby Boomers who had lost much of their retirement capital in late 2008 could get it back). The underlying stock was SPY (the tracking stock for the S&P 500, so we were essentially betting on the market as a whole rather than any individual stock. I started with $10,000 but every month when the portfolio was worth more than that, I withdrew the extra amount.
A little more than a year later, I had withdrawn $6600 from the portfolio and it was still worth over $10,000 (after paying all commissions, of course). Hundreds of my subscribers had mirrored this portfolio and enjoyed those returns right along with me.
Some people discounted these remarkable gains because the market had moved steadily higher most months in 2009 and early 2010. But then the May 2010 expiration month came along and concerns in Greece and Europe spooked the entire market. The S&P fell over 8% .
So how did the Boomer’s Revenge portfolio hold up when the market swooned? I am proud to report that we gained over 4% that month while investors all around were gnashing their teeth.
The great thing about this strategy is that it can make money even if the market as a whole falls in value (just as long as the drop is not too great) In May 2010 we proved that the market could fall as much as 8% and we could still make a nice gain.
What we didn’t have to do to achieve these results was maybe even more remarkable than what we did have to do. We didn’t have to be smart traders to make this money. We did not have to guess which way the market would move. We did not have to pick a hot stock, or any stock. We just followed a pre-determined set of Trading Rules, buying longer-term options and selling short-term options to someone else.
The 10K Strategy takes a little work, and at least a small understanding of stock options, but it is well worth the effort. (Actually, you don't even have to understand it all if you subscribe to my Options Tutorial Program, where I email you every trade I make once it is made. You can mirror my trades, and maybe even get better prices than I do.) You can order it here.
Are you willing to make the effort?
How would you feel about yourself if you did not take the hour or two it might take to learn how to make extraordinary returns on your money every year, even if your stock doesn't go up at all?
On the other hand, how would it feel to know that you understood a trading strategy that could multiply your net worth many times over in a few short years? Think of the exotic vacations you could take, the fancy cars you could buy, and the early retirement you could earn — all possible because you understood and used an investment vehicle (stock options) that scare most people to death.
This is no fishy proposition.
While making 36% every year without taking big risks may sound too good to be true, this is no fishy proposition. I am not giving you fish — mahi-mahi, red snapper or sea bass. Holy mackerel, all I'm doing is teaching you how to fish. I will give you a formula. Once you have learned it, you may be able to make extraordinary returns on your money every single year – without any help from me.
You will be proud of your newfound ability to achieve stock market riches with this formula. Your family and friends will love you. Your business associates will envy you. Your mother will take full credit for your success.
Here's the fine print.
Okay, anything this good must have some drawbacks, so here they are:
I can't guarantee a 36% return in one year while not risking a loss. But I can show you every trade we made in 2009 that resulted in better than a 60% gain on our money (after paying all the commissions).
You will have to work. That means placing option orders with your discount broker on or about the third Friday of each month. When you subscribe to Terry's Tips . I will email you the exact trades I make in every portfolio using the 10K Strategy (for two months there is no extra charge). Once you understand how the strategy unfolds you probably won't need my help any longer. You will know exactly what to do each month on your own.
You will need to have access to an Internaet connection or a telephone on or about the third Friday (expiration day), and sometimes for adjustments at other times. This is not always easy, but I have made hundreds of trades on the telephone from a remote island in the Bahamas, a bastide in Provence, and a small village in the middle of Russia. So it is almost always possible.
Most of your profits will be taxed as short-term capital gains. This is a major disadvantage of the strategy and a big reason to carry it out in your IRA or other tax-deferred account.
Yes, you can use this strategy in your IRA. You will have to set up an IRA account with a broker who allows option spreads (very few brokers do). My favorite broker is thinkorswim, Inc . by TD Ameritrade . ( Barron's choice of the #1 software-based options broker for several years running) and I highly recommend them for option traders. Their rates are quite low, their website is option-friendly, and you will have more information about your options (including deltas, gammas, and other Greek measures) than you will probably ever need.
Does the stock have to go up for the 10K Strategy to be profitable?
As long as the stock moves only moderately (5% or so) during an expiration month, it doesn’t matter which way the stock moves. We spend a good share of the invested amount in an insurance bet that pays off only if the stock falls (and usually maintain a cash reserve for a downside adjustment as well).
A Conservative Options Strategy
Many people believe that a conservative options strategy is an oxymoron. Options are leveraged and depreciating investments that involve a great deal of risk. However, for virtually every option that the 10K Strategy owns, there is an offsetting short option to protect against a moderate stock price move in either direction.
The 10K Strategy in a nutshell - it's all about the Decay Rate
Decay Rate for a Typical Option
If the price of the stock remains the same, all options become less valuable over time. This makes total sense. If you own an option that has a year to go before it expires, you would be willing to pay more for it than you would for an option that lasted only a month.
The amount that the option falls in value is called its decay . There are two interesting aspects of decay. First, it tends to be quite low when there is a long time until the option expires. Second, decay increases dramatically as the option moves toward the date when it expires (the expiration date).
A typical 12-month call option (strike price 70) for a $70 stock might be about $7.80. Instead of paying $7000 to buy 100 shares of the stock, you could buy the right to purchase the stock at $780. Having the option would give you all the rights of stock ownership except receiving dividends and voting on company matters. For every dollar the stock went up, you would gain $100 just like the owner of 100 shares would enjoy.
Of course, you wouldn’t actually make a gain until after the stock had gone up by $7.80 to cover the cost of the call option you bought. But you would have a full year for that to happen.
Each month you waited to buy this option (assuming the stock stayed at $70), you would pay less much less. When there was only a month to go until expiration, a one-month call option (same strike, same $70 stock) might sell for $1.80 The stock would only have to go up $1.80 before you made money on your call purchase, but there would only be one month for that to happen.
Most option buyers prefer to pay $1.80 for an option that only has a month of remaining life rather than $7.80 for an option that has a year of life. In the 10K Strategy . we do just the opposite.
In the 10K Strategy . at the same time we buy options with several months of remaining life until expiration, we sell someone else an option that only has a month to go until expiration. We are allowed to use our longer-term option as collateral for the short term sale.
When you simultaneously buy a long-term option and sell a short-term option on the same underlying stock or ETF at the same strike price, you are placing what is called a calendar spread (also called a time spread ).
The price we pay is the difference in price between the two options. Por ejemplo:
Buy one-year call option at 70 strike price for $7.80 Sell one-month call option at 70 strike price for $1.80 Cost of spread: $6.00 ($600)
After one month, if the price of the stock remains at $70, the price of the option we bought for $7.80 will have fallen in value by about $.40, and would be worth about $7.40. However, the option we sold to someone else would be worthless since the stock price is not higher than $70 and there is no time remaining for the option.
At the end of one month (assuming the stock is still at $70), the spread that we purchased for $600 would then consist of a single call option with 11 months of remaining life which is worth $740. We would have made a gain of $140, or about 23% on our investment in a single month (less commissions). At that point, we would sell another one-month option for $180 and wait for another month to expire.
If the stock remained at $70 for an entire year, and we sold a one-month option 11 more times for $1.80 a pop, we would collect $19.80 ($1980) on our original investment of $6.00 ($600), or over 300%.
The difference in the lower decay rate of the long-term option we own and the higher decay rate of the short-term option we sell is the essence of the 10K Strategy . Everything else is just details.
Of course, this is a simplified example. Commissions would eat a little into the gains, and the stock will never stay exactly flat. Sometimes it will stay almost flat, however, and we would earn over 20% in a single month in the above example.
The 10K Strategy consists spending most of your cash to purchase call calendar spreads at strikes near and above the stock price. A portion of portfolio value, usually 10% - 20% is retained as a reserve in case adjustments need to be made.
For example, if the stock falls early in an expiration month, some downside protection might be added on to insure that if the market continues to fall, a loss can be avoided. These adjustments might take one of several possible forms. The most common one would be to purchase additional calendar spreads at strike prices below the stock price.
We have also had good luck with what we call an exotic butterfly spread. This is much like a traditional butterfly spread except that one of the legs is in a further-out month. When you become a Terry’s Tips Insider . our options tutorial will include a complete set of adjustment Trading Rules, including both the traditional and exotic butterfly spreads.
Buy the Book and Learn all About Calendar Spreads and the 10K Strategy
If you would like to see how calendar spreads can be used to achieve consistent returns every year that the market moves moderately in either direction, all you have to do is buy a copy of my book ( Making 36% ).
You can buy the book at the discounted price of only $12.94 - go to www. Making36Percent. com and enter the Discount Code TEE and you will receive:
An electronic version of Making 36%: Duffer’s Guide to Breaking Par in the Market Every Year, in Good Years and Bad.
A copy of the paperback book mailed to you by first class mail.
This may seem a little hard to believe. For a total cost of $12.94, you will have everything you need to make superior investment returns for many years. It could easily be worth hundreds of thousands of dollars to you. There is nothing else for you to buy (unless you would like to learn even more, and become a Terry's Tips Insider ).
Making 36% – A Duffer's Guide to Breaking Par in the Market Every Year in Good Years and Bad
Here is what the book looks like (but the good stuff is inside):
The book was originally published at $19.95. You will receive an electronic version so you can start right away, and the paperback version will be mailed to you free of shipping and handling charges. Order it today at www. Making36Percent. com (Enter the discount code TEE and your cost will be only $12.94, including shipping by First Class mail).
This could be the best investment decision you ever make. At least, you won't be risking much to learn the strategy. And it could change your investment outlook for a lifetime. Total cost, including shipping only $12.94 - www. Making36Percent. com (Enter the discount code TEE ).
Lots of people like GM. It is one of the most popular stocks in some of the largest mutual funds in America. Investors seem to like the 5.2% dividend it pays. Today I will show you how you could make 8 times that much with an options bet that will net 45% even if the stock doesn’t go up by a penny.
How to make 45% with a Safe Bet on GM
First, an update on my last 3 trade recommendations. Five weeks ago, I suggested a trade that would make 66% after commissions if Facebook (FB) closed at any price above $97.50 on March 18, 2016. FB is now trading above $106 and that looks like a sure winner when it closes out a week from today.
A little over 3 weeks ago I suggested a similar trade on Costco (COST) when it was trading at $147.20. This one would make 40% after commissions if COST finishes at any price above $145 next Friday (March 18th). It is now trading near $152. This one also looks like a sure winner.
The third suggestion.
Way back when Google (GOOGL) went public at $80 a share, I decided that I would like to own 100 shares and hang on to it for the long run. Obviously, that was a good idea as the stock is trading today at $716. My $8000 investment would now be worth $144,000 (the stock had a 2-for-1 split in November 2014) if I had been able to keep my original shares. Unfortunately, over the years, an options opportunity inevitably came along that looked more attractive to me than my 100 shares of GOOGL, and I sold my shares to take advantage of the opportunity.
Many times my investment account had compiled a little spare cash, and I went back into the market and bought more shares of GOOGL, always paying a little more to buy it back. At some point it felt like I just had too much money tied up in it. An $8000 commitment is one thing, but $144,000 is a major commitment.
Today I would like to share how I own the equivalent of 100 shares of GOOGL for an investment of less than.
February 25, 2016
I would like to tell you about an option trade I made today and share my thinking process that went into it. I figure it has an extremely low risk of losing and it could easily double or triple your investment (after paying the commissions). The investment amount per contract is quite low and it is mathematically impossible to lose all of your bet. You will only have to wait two or three weeks to learn the outcome. It involves one of my favorite stocks, Nike (NKE).
A $40 Option Bet on Nike (Including Commissions)
First, an update on my last two trade recommendations. Two weeks ago, I suggested a trade that would make 66% after commissions if Facebook (FB) closed at any price above $97.50 on March 18, 2016. FB has now recovered and is about $107 and the spread looks like it will be a sure winner. All you have to do is.
Making 36% – A Duffer's Guide to Breaking Par in the Market Every Year in Good Years and Bad
This book may not improve your golf game, but it might change your financial situation so that you will have more time for the greens and fairways (and sometimes the woods).
Averigüe por qué el Dr. Allen cree que la Estrategia 10K es menos riesgosa que poseer acciones o fondos mutuos, y por qué es especialmente apropiado para su IRA.
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This document contains final regulations relating to statutory options. These final regulations affect certain taxpayers who participate in the transfer of stock pursuant to the exercise of incentive stock options and the exercise of options granted pursuant to an employee stock purchase plan (statutory options). These regulations provide guidance to assist these taxpayers in complying with the law in addition to clarifying rules regarding statutory options.
DATES:
Effective Date: These regulations are effective on August 3, 2004. For rules concerning reliance and transition period, see §§1.421-1(j)(2), 1.421-2(f)(2), 1.422-5(f)(2), and 1.424-1(g)(2).
FOR FURTHER INFORMATION CONTACT:
The collection of information contained in these final regulations (see §1.6039-1) has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U. S.C. 3507) under control number 1545-0820. Responses to this collection of information are required to assist taxpayers with the completion of their income tax returns for the taxable year in which a disposition of statutory option stock occurs.
An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number assigned by the Office of Management and Budget.
The estimated annual burden per respondent varies from 15 minutes to 25 minutes, depending on individual circumstances, with an estimated average of 20 minutes.
Comments concerning the accuracy of this burden estimate and suggestions for reducing this burden should be sent to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224, and to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503.
Books or records relating to this collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U. S.C. 6103.
Fondo
This document contains amendments to 26 CFR part 1 under sections 421, 422, and 424 of the Internal Revenue Code (Code). Changes to the applicable tax law concerning section 421 were made by sections 11801 and 11821 of the Omnibus Budget Reconciliation Act of 1990 (OBRA 90), Public Law 101-508 (104 Stat. 1388). Changes to the applicable tax law concerning section 424 were made by section 1003 of the Technical and Miscellaneous Revenue Act of 1988 (TAMRA), Public Law 100-647 (102 Stat. 3342), sections 11801 and 11821 of OMBRA 90, which included re-designating section 425 as section 424 of the Code, and section 1702(h) of the Small Business Job Protection Act of 1996, Public Law 104-88 (110 Stat. 1755). Changes concerning section 422 were made by section 251 of the Economic Recovery Tax Act of 1981, Public Law 97-34 (95 Stat. 172), which added section 422A to the Code. Related changes to section 422A were made by section 102(j) of the Technical Corrections Act of 1982, Public Law 97-448 (96 Stat. 2365), section 321(a) of Tax Reform Act of 1986, Public Law 99-514 (100 Stat. 2085), section 1003(d) of TAMRA, and sections 11801 and 11821 of OBRA 90, which included re-designating section 422A as section 422 of the Code.
Regulations under section 421 governing the requirements for restricted stock options and qualified stock options, as well as options granted under an employee stock purchase plan, were published in the Federal Register on December 9, 1957 (T. D. 6276, 1957-2 C. B. 271), November 26, 1960 (T. D. 6500), January 19, 1961 (T. D. 6527, 1961-1 C. B. 153), January 20, 1961 (T. D. 6540, 1961-1 C. B. 161), December 12, 1963 (T. D. 6696, 1963-2 C. B. 23), June 24, 1966 (T. D. 6887, 1966-2 C. B. 129), July 24, 1978 (T. D. 7554, 1981-1 C. B. 56), and November 3, 1980 (T. D. 7728, 1980-2 C. B. 236). Temporary regulations under section 422A providing guidance and transitional rules related to incentive stock options were published in the Federal Register on December 17, 1981 (T. D. 7799, 1982-1 C. B. 67) and September 18, 1992 (T. D. 8435, 1992-2 C. B. 324).Final regulations under section 422 related to stockholder approval were published in the Federal Register on December 1, 1988 (T. D. 8235, 1989-1 C. B. 117) and November 29, 1991 (T. D. 8374, 1991-2 C. B. 320). Regulations under section 425 were published in the Federal Register on June 23, 1966 (T. D. 6887, 1966-2 C. B. 129).
Proposed changes to the final regulations under sections 421, 424, and 6039 and proposed regulations under section 422A were previously published in the Federal Register at 49 FR 4504 (LR-279-81, 1984-1 C. B. 714) on February 7, 1984 (the 1984 proposed regulations). With the exception of certain stockholder approval rules, the 1984 proposed regulations provided a comprehensive set of rules under section 422 of the Code. The 1984 proposed regulations and the temporary regulations have been withdrawn. See 68 FR 34344.
On June 9, 2003, a notice of proposed rulemaking (REG-122917-02, 2003-27 I. R.B. 15) was published in the Federal Register at 68 FR 34344 (the 2003 proposed regulations). No hearing concerning the 2003 proposed regulations was held; however, the IRS received written and electronic comments responding to this notice. After consideration of these comments, the 2003 proposed regulations are adopted as amended by this Treasury decision. The significant revisions are discussed below.
Explanation of Provisions
Visión de conjunto
In general, the income tax treatment of the grant of an option to purchase stock in connection with the performance of services and of the transfer of stock pursuant to the exercise of such option is determined under section 83 of the Code and the regulations thereunder. However, section 421 of the Code provides special rules for determining the income tax treatment of the transfer of shares of stock pursuant to the exercise of an option if the requirements of section 422(a) or 423(a), as applicable, are met. Section 422 applies to incentive stock options, and section 423 applies to options granted under an employee stock purchase plan (collectively, statutory options).
Under section 421, if a share of stock is transferred to an individual pursuant to the exercise of a statutory option, there is no income at the time of exercise of the option with respect to such transfer, and no deduction under section 162 is allowed to the employer corporation with respect to such transfer. However, pursuant to section 56(b)(3), section 421 does not apply with respect to the exercise of an incentive stock option for purposes of the individual alternative minimum tax.
Section 422(a) of the Code provides that section 421 applies to the transfer of stock to an individual pursuant to the exercise of an incentive stock option if (i) no disposition of the share is made within 2 years from the date of grant of the option or within 1 year from the date of transfer of the share, and (ii) at all times during the period beginning on the date of grant and ending on the day 3 months before the exercise of the option, the individual is an employee of either the corporation granting the option or a parent or subsidiary of such corporation, or a corporation (or a parent or subsidiary of such corporation) issuing or assuming a stock option in a transaction to which section 424(a) applies. Section 422(b) provides several requirements that must be met for an option to qualify as an incentive stock option. Section 422(c) provides special rules applicable to incentive stock options, and section 422(d) provides a $100,000 per year limitation with respect to incentive stock options.
Section 424 of the Code provides special rules applicable to statutory options, including rules concerning the modification of statutory options and the substitution or assumption of an option by reason of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization, or liquidation. Section 424 also contains definitions of certain terms, including disposition . parent corporation . and subsidiary corporation . Finally, section 424 provides special rules related to attribution of stock ownership and the effect of stockholder approval on the date of grant of a statutory option.
These final regulations provide comprehensive rules governing incentive stock options that, as did the 2003 proposed regulations, incorporate many of the rules contained in the 1984 proposed regulations. However, the 2003 proposed regulations are re-numbered, and these final regulations adopt that reorganization. These final regulations also make changes to the final regulations under sections 421 and 424 to provide additional guidance, as discussed below, in certain areas, to reflect the new organizational structure of the statutory option rules (including the re-designation of §1.425-1 as §1.424-1), and to remove obsolete rules and cross-references.
Section 421: General Rules
Sections 422 and 423 provide that a statutory option may be granted to an individual who is an employee of the corporation granting the option, a parent or subsidiary of such corporation, or a corporation or a parent or subsidiary of such corporation issuing or assuming a stock option in a transaction to which section 424(a) applies.
Section 1.421-1(h) of the 2003 proposed regulations further describes the requisite employment relationship for purposes of a statutory option. The 2003 proposed regulations provide that an option is a statutory option only if, at the time the option is granted, the optionee is an employee of the corporation granting the option or a related corporation of such corporation. In the case of an assumption or substitution under §1.424-1(a), the optionee must, at the time of the assumption or substitution, be an employee of the corporation assuming or substituting the option or a related corporation of such corporation. In response to comments, these final regulations provide that in the case of an assumption or substitution under §1.424-1(a) an option also will be treated as granted to an employee of the granting corporation if the optionee is an individual who is in the 3-month period following termination of the employment relationship.
Section §1.421-1(h)(2) of the 2003 proposed regulations also provides that the employment relationship is considered to continue intact while an individual is on military leave, sick leave, or other bona fide leave of absence if the period of leave does not exceed 3 months, or if longer, so long as the individual’s right to reemployment with the corporation granting the option (or a related corporation of such corporation) or a corporation assuming or substituting an option under §1.424-1(a) is guaranteed by statute or contract. Commentors requested clarification in the final regulations concerning whether the right to reemployment must be absolute and whether the right to reemployment provided by the Family Medical Leave Act or the Uniformed Services Employment and Reemployment Rights Act satisfies the requirements of this section. These final regulations provide that the right to reemployment must be provided by statute or contract. Thus, for example, if an optionee is on leave pursuant to the Family Medical Leave Act, the Uniformed Services Employment and Reemployment Rights Act, or any similar statute providing for continued employment rights for an extended period of time, the employment relationship is considered intact.
Section 422: Incentive Stock Options
1. Special rules regarding disqualifying dispositions
The general rules concerning disqualifying dispositions are described in §1.421-2(b) of the 2003 proposed regulations. Under these rules, if there is a disqualifying disposition of a share of stock, the special tax treatment provided by section 421 and §1.421-2(a) does not apply to the transfer of the share. The effects of a disqualifying disposition are determined under section 83(a). Thus, in the taxable year in which the disqualifying disposition occurs, the individual must recognize compensation income equal to the fair market value of the stock (determined without regard to any lapse restriction and without regard to any reduction for any brokerage fees or other costs paid in connection with the disposition) on the date the stock is substantially vested less the exercise price. (See section 422(c)(2) concerning special rules that are applicable where the amount realized in a disposition is less than this difference.) A deduction is allowable for the taxable year in which such disqualifying disposition occurs to the employer corporation, its parent or subsidiary corporation, or a corporation substituting or assuming an option in a transaction to which §1.424-1(a) applies. Section 422(c)(2) and §1.422-1(b) of the 2003 proposed regulations provide special rules concerning disqualifying dispositions.
The application of the disqualifying disposition rules is described in several examples in §1.422-1(b)(3) of the 2003 proposed regulations. In Example 1 of §1.422-1(b)(3) of the 2003 proposed regulations, on exercise of an incentive stock option, the optionee receives vested stock and disposes of the stock before meeting the applicable holding period. In this example, the amount of compensation income is based on the fair market value of the stock on the date of exercise less the exercise price, and the section 422(a)(1) holding period is based on the date of exercise.
However, in Example 2 of §1.422-1(b)(3) of the 2003 proposed regulations, the optionee receives nonvested stock on exercise of an incentive stock option. This example retains the same holding period for the receipt of nonvested stock, but computes the amount of compensation income based on the date of vesting of the underlying stock (rather than the date of exercise).
Several commentors suggested that if the option is exercised for nonvested stock the compensation income should not be calculated on the date of vesting because section 83 does not apply to a transaction to which section 421 applies (and section 421(b) applies to a disqualifying disposition). Instead, the compensation income should be computed on the date of exercise. Alternatively, if the proposed rule is retained, commentors suggest that the final regulations and examples provide that an optionee may make a protective section 83(b) election on exercise of the option.
These final regulations retain the rules described in the 2003 proposed regulations, however, the examples in §1.422-1(b)(3) of the final regulations more fully describe the application of the disqualifying disposition rules. Specifically, Example 2 indicates that pursuant to section 83(e)(1) of the Code, section 83 does not apply to a transaction to which section 421 applies. Thus, on exercise of a statutory option section 83 does not apply, and an optionee cannot make an effective election under section 83(b) for purposes of the income tax consequences on the date of exercise. However, an effective election under section 83(b) may be made for purposes of the alternative minimum tax, which calculates income as if section 83 applies. Example 2 also illustrates that on a disqualifying disposition, the rules of section 83 and the regulations thereunder (rather than section 422 and the regulations thereunder) are used to determine the amount of compensation includible in income. Applying the rules under section 83(a), the amount of compensation includible is the difference between the fair market value of the stock on the date the substantial risk of forfeiture lapses less the fair market value on the date of exercise. Additionally, Example 2 demonstrates that there is a transfer (as defined in §1.421-1(g) of the final regulations) of the stock on the date of exercise for purposes of the holding period requirement of section 422(a)(1). Thus, the holding period for the transfer of the stock for purposes of section 422 and the holding period requirements begins on the date of exercise (rather than the date of vesting).See also, §1.422-1(b)(3), Example 3 . However, in the event of a disqualifying disposition, the amount of capital gain (if any) and the holding period for purposes of determining capital gain is computed from the date of vesting.
2. Shareholder approval
Among other requirements, to qualify as an incentive stock option, the option must be granted pursuant to a plan which is approved by the stockholders of the granting corporation within 12 months before or after the date the plan is adopted. See section 422(b) and §1.422-2(b)(2)(i) of the 2003 proposed regulations.
These final regulations retain the rules contained in the 2003 proposed regulations concerning shareholder approval. However, an additional example in §1.422-2(b)(6) illustrates the shareholder approval requirements where an incentive stock option plan is assumed in connection with a corporate transaction. See §1.422-2(b)(6), Example 3 .
In Example 3 of §1.422-2(b)(6) of these final regulations, Corporation X maintains an incentive stock option plan, but Corporation Y does not maintain such a plan. The companies combine to form one corporation that will be named Y, the plan will be continued by Y, and future grants under the plan will be made by Y (the new combined entity). The consolidation agreement describes the plan, including the maximum aggregate number of shares available for issuance pursuant to incentive stock options under the plan after the consolidation and the employees eligible to receive options under the plan. Because there is a change in the granting corporation under §1.422-2(b)(3)(iii), Y is considered to have adopted a new plan that must satisfy the shareholder approval requirements. In this example, because the consolidation agreement describes the plan and indicates that it will continue after the consolidation, the shareholder approval requirements of §1.422-2(b)(3) are satisfied, and the plan is considered adopted and approved on the date the consolidation agreement is approved. See Rev. Rul. 68-233, 1968-1 C. B. 187.
3. Maximum aggregate number of shares
Section 422(b)(1) provides that an incentive stock option must be granted pursuant to a plan that includes the aggregate number of shares which may be issued under options. Section 1.422-2(b)(3)(i) of the 2003 proposed regulations provides that the plan must designate the maximum aggregate number of shares that may be issued under the plan through incentive stock options, nonstatutory options, and all other stock-based awards to be granted under the plan.
In response to comments, these final regulations provide that the plan must designate the maximum aggregate number of shares that may be issued under the plan through incentive stock options. Thus, for example, if a corporation maintains an omnibus plan under which incentive stock options, nonstatutory options, and other stock-based awards may be made, the plan must contain a maximum number of shares that may be issued as incentive stock options under the plan. Such a number may be expressed as a limit specific to incentive stock options or as a limit on all awards under the plan, including incentive stock options. These final regulations do not require the plan to include the maximum number of shares that may be issued pursuant to nonstatutory options or other stock-based awards.
Commentators also asked whether the maximum aggregate number of shares that may be issued under an incentive stock option plan is affected by the use of outstanding shares used to exercise an option. Under these final regulations, only the net number of shares that are issued pursuant to the exercise of a statutory option are counted against the maximum aggregate number of shares. For example, if the exercise price of an option to purchase 100 shares equals the value of 20 shares, and the corporation permits the employee to use those 20 of the 100 shares to pay the exercise price of the option, and the corporation only issues 80 shares to the optionee, then 80 shares are counted against the maximum aggregate number of shares (rather than 100).
4. Option price
Under section 422(b)(4), the option price of an incentive stock option must not be less than the fair market value of the stock at the time the option is granted. The 2003 proposed regulations retain this rule, but also provide that the option price may be determined in any reasonable manner, including the valuation methods permitted under §20.2031-2 (Estate Tax Regulations), so long as the minimum price possible under the terms of the option is not less than the fair market value of the stock on the date of grant.
Section 1.422-2(e)(2)(i) of the 2003 proposed regulations provides that if a share of stock is transferred to an individual pursuant to the exercise of an incentive stock option, which fails to qualify as an incentive stock option because the exercise price is less than the fair market value of the underlying stock on the date of grant, such requirement is still considered to have been met if there was an attempt, made in good faith, to meet the option price requirements of §1.422-2(e)(1).
For nonpublicly traded stock, §1.422-2(e)(2)(iii) provides that if it is demonstrated that the fair market value of the stock on the date of grant was based on an average of the fair market values as of such date set forth in the opinions of completely independent and well-qualified experts, such a determination establishes that a good-faith attempt to meet the option price requirements of §1.422-2(e) was made. Taxpayers are required to retain adequate books and records to demonstrate that the option price requirements are satisfied. See section 6001.
Commentors suggested that the final regulations be revised to provide that a good-faith attempt to meet the option price requirements is demonstrated if the value of the stock is determined by a qualified appraiser (as defined in §1.170A-13(c)(5)), by an individual (rather than more than one individual) who is not a qualified appraiser, or by the corporation at the date of grant. Because of concerns that the value determined under these approaches may not reliably reflect the fair market value of the stock on the date of grant, these final regulations retain the rules described in the 2003 proposed regulations.
5. $100,000 limitation
Section 422(d)(1) provides that, to the extent that the aggregate fair market value of stock with respect to which incentive stock options (determined without regard to section 422(d)) are exercisable for the first time by an individual during the calendar year (under all of the plans of the employer corporation and any related corporation) exceeds $100,000, such options are not treated as incentive stock options. Under section 422(d)(2), options are taken into account in the order in which they are granted. Section 422(d)(3) provides that the fair market value of stock is determined at the time the option is granted.
Section 1.422-4(b)(5)(ii) of the 2003 proposed regulations provides that if the option is not canceled, modified, or transferred prior to the year in which it would first become exercisable, it is treated as outstanding until the end of the year in which it first becomes exercisable. Commentors suggested that the final regulations permit an individual to cancel, modify, or transfer an option at any time prior to the date of exercise (rather than the year it first becomes exercisable). Because of concerns about the administrability of a rule that, for purposes of the $100,000 limitation, would permit an individual to determine the status of an option as statutory or nonstatutory until the date of exercise, these final regulations retain the rule described in the 2003 proposed regulations.
Section 1.422-4(c) of the 2003 proposed regulations provides that the application of the $100,000 limitation may result in an option being treated, in part, as an incentive stock option and, in part, as a nonstatutory option. In response to comments, these final regulations provide additional guidance concerning the treatment of options (and the stock purchasable thereunder) that are bifurcated into an incentive stock option and nonstatutory option as a result of the application of the $100,000 limitation.
These final regulations provide that a corporation may issue a separate certificate for incentive stock option stock or designate such stock as incentive stock option stock in the corporation’s transfer records or the plan records. The issuance of separate certificates or designation in plan records is not considered a modification under §1.424-1(e). However, in the absence of such an issuance or designation, shares are deemed purchased under an incentive stock option first to the extent of the $100,000 limitation, and then the excess shares are deemed purchased under a nonstatutory option.
Section 424: Definitions and Special Rules
1. Substitution, Assumption, and Modification of Options
Section 424(h)(1) provides that if the terms of an option are modified, extended, or renewed, such modification, renewal, or extension is treated as the grant of a new option. Under section 424(h)(3), the term modification (with certain exceptions) means any change in the terms of an option which gives the optionee additional benefits under the option. One exception to this definition is that a change in the terms of an option attributable to a substitution or an assumption that meets the requirements of section 424(a) is not a modification of an option.
The 2003 proposed regulations provide that an eligible corporation (as defined in §1.424-1(a)(2)) may, by reason of a corporate transaction (as defined in §1.424-1(a)(3)), substitute a new statutory option (new option) for an outstanding statutory option (old option) or assume an old option without the substitution or assumption being considered a modification of the old option under section 424(h). These final regulations retain most of the rules contained in the 2003 proposed regulations, with certain changes.
Under the 2003 proposed regulations, a corporate transaction is (i) a corporate merger, consolidation, acquisition of property or stock, separation, reorganization, or liquidation; (ii) a distribution (excluding ordinary dividends), or change in the terms or number of outstanding shares of such corporation, such as a stock split or stock dividend (a change in capital structure); (iii) a change in the name of a corporation whose stock is purchasable under the old option; and (iv) such other corporate events as may be prescribed by the Commissioner in published guidance.
In response to comments, these final regulations provide that a “distribution” does not include a stock dividend or stock split (including a reverse stock split) that merely changes the number of outstanding shares of a corporation. Thus, an outstanding option is not treated as substituted or assumed under section 424(a) and §1.424-1(a) in connection with a stock dividend or stock split that merely changes the number of outstanding shares. Instead, the exercise price of an outstanding option may be proportionally adjusted to reflect a stock dividend or stock split that merely changes the number of outstanding shares of a corporation under §1.424-1(e). This adjustment is not a modification of the option, and because the stock dividend or stock split is not a corporate transaction, the requirements of §1.424-1(a), including the spread and ratio tests, do not have to be satisfied.
The 2003 proposed regulations also provide that a new or assumed option must otherwise qualify as a statutory option. See §1.424-1(a)(5)(vi) of the 2003 proposed regulations. The 2003 proposed regulations provide that, except as necessary to comply with the specific requirements regarding substitution or assumption, such as the rules concerning ratio and spread, the option must comply with the requirements of §1.422-2 of the 2003 proposed regulations or 1.423-2, as applicable. Thus, under the 2003 proposed regulations, for example, the new option must be substituted, or the old option must be assumed, under a plan approved by the stockholders of the corporation substituting or assuming the option.
In Rev. Rul. 71-474, 1971-2 C. B. 215, involving qualified stock options, the IRS held that qualified stock options assumed by a corporation in a merger with the granting corporation retained their status as qualified stock options without approval of the assuming corporation’s stockholders. In the ruling, the IRS indicated that approval of the persons who owned stock of the granting corporation at the time the plan originally was approved was sufficient to satisfy the stockholder approval requirements.
In response to comments, these final regulations refrain from imposing an additional stockholder approval requirement for statutory options that have been granted and are outstanding at the time of a corporate transaction. Thus, the requirement in §1.424-1(a)(5)(vi) of the 2003 proposed regulations is removed. Further, the examples in §1.424-1(a)(10) of these final regulations demonstrate that if the shareholder approval requirements are met on the date of grant, a subsequent substitution or assumption of an outstanding option (old option) by an acquiring corporation does not require additional stockholder approval for the substituted or assumed option (new option) to continue to qualify as a statutory option. See, §1.424-1(a)(10), Example 9 . For example, assume Corporation X maintains an incentive stock option plan that meets the requirements of §1.422-2 on the date of grant. E, an employee of X, holds outstanding incentive stock options to acquire X stock on exercise of the options. If Corporation Y acquires X and substitutes new options to acquire Y stock for the old options to acquire X stock held by E, the substitution of the new Y options does not require new stockholder approval. The result is the same if the options are assumed by Y. However, for future options granted under the plan to qualify as incentive stock options, the plan must be approved by the Y shareholders. (See, §1.422-2(b)(6) Example 3 . for guidance concerning future grants under an option plan that is assumed in a corporate transaction.)
Finally, commentors requested guidance concerning the treatment of earn-out payments received by option holders in connection with a corporate transaction. Because of the factual nature of these transactions, these final regulations do not address the issues raised by these transactions. However, this area is currently under study and may be the subject of future guidance of general applicability under § 601.601(d)(2).
2. Modification, extension, or renewal of option
Section 424(h)(3) provides that a modification is any change in the terms of an option which gives the optionee additional benefits under the option, with certain specified exceptions.
Under §1.424-1(e)(4)(iii) of the 2003 proposed regulations, a change to an option providing that the optionee may receive an additional benefit under the option at the future discretion of the granting corporation is a modification of the option at the time the option is changed to provide the discretion. Additionally, the exercise of such discretion is a modification of the option. Although several commentors suggested that the final regulations provide that the later exercise of the discretion is not a modification of the option, these final regulations retain the rule contained in the 2003 proposed regulations.
However, as under the 2003 proposed regulations, it is not a modification for the granting corporation to exercise discretion specifically reserved under an option related to the payment of a bonus at the time of the exercise of the option, the availability of a loan at exercise, or the right to tender previously-owned stock for the stock purchasable under the option. A change to an option adding such discretion, however, is a modification.
Commentors suggested broadening this rule to include the exercise of any reserved discretion under the option. These final regulations, however, only expand this rule to provide that it is not a modification to exercise discretion specifically reserved under an option with respect to the payment of employment taxes and/or withholding taxes resulting from the exercise of a statutory option.
The 2003 proposed regulations also provide that an option is not modified merely because an optionee is offered a change in the terms of the option if the change is not made. These final regulations retain this rule, but also provide that if an offer to change the terms of the option remains outstanding for less than 30 days, the option is not modified. However, if the offer to change the terms of the option remains outstanding for 30 days or more, the option is treated as modified as of the date the offer to change the terms of the option is made.
Finally, commentors suggested that these final regulations provide an exception to the modification rule for an inadvertent change to a statutory option where the change is promptly reversed. In response, these final regulations provide that any inadvertent modification of an option is not treated as a modification to the extent the modification is reversed by the earlier of the date the option is exercised or the last day of the calendar year during which such change occurred.
Section 6039
Under section 1.6039-1(f) of the 2003 proposed regulations, the issue of furnishing electronic statements was reserved. These final regulations provide that the furnishing of statements in electronic form is permitted, provided the recipient consents to that means of delivery.
Par. 2. Sections 1.421-1 through 1.421-6 are removed.
Par. 3. Section 1.421-7 is re-designated as §1.421-1 and is amended as follows:
1. In paragraph (a)(1), first sentence, the language “sections 421 through 425” is removed and “this §§1.421-1 through 1.424-1” is added in its place.
2. In paragraph (a)(1), first sentence, the language “includes” is removed, and “means” is added in its place.
3. In paragraph (a)(1), removing the second sentence.
4. Removing the last sentence of paragraph (a)(1) and adding two sentences in its place.
5. Revising paragraph (a)(3).
6. Revising paragraphs (b)(1) and (b)(2).
7. In paragraph (b)(3)(i), third sentence, removing the language “1.425-1” and inserting “1.424-1” in its place.
8. In the list below, for each section indicated in the left column, remove the language in the middle column and add the language in the right column:
Newly Designated Section
9. Revising the last sentence of paragraph (b)(3)(ii) Example 1 .
10. Removing the last sentence of paragraph (b)(3)(ii) Example 2 . and adding two sentences in its place.
11. Removing the first sentence of paragraph (c)(1) and adding two new sentences in its place.
12. In paragraph (c)(2), second sentence, the language “425” is removed and “424” is added in its place.
13. In paragraph (c)(3), second and last sentences, the language “1964” is removed and “2004” is added in its place.
14. In paragraph (c)(3), second sentence, the language “1965” is removed wherever it appears and “2005” is added in its place.
15. Revising paragraphs (d) and (e).
16. In paragraph (f), in the first sentence, the language “sections 421 through 425” is removed and “this section and §§1.421-2 through 1.424-1” is added in its place.
17. Revising the last sentence of paragraph (f).
18. In paragraph (g), first sentence, the language “sections 421 through 425” is removed and “this section and §§1.421-2 through 1.424-1” is added in its place.
19. Adding a new third, fourth, and fifth sentences to paragraph (g).
20. Revising the first, second, and third sentences of paragraph (h)(1).
21. Revising paragraph (h)(2).
22. In paragraph (h)(3), first sentence, the language “425” is removed and “424” is added in its place.
23. In paragraph (h)(3), last sentence, the language “or assuming” is removed and “the option or substituting or assuming the option” is added in its place.
24. In the list below, for each section indicated in the left column, remove the language in the middle column and add the language in the right column:
Newly Designated Section
1.421-1(h)(4) Example 2 . last sentence
for A is then employed by a corporation which issued an option under section 425(a).
to the transfer of the M stock because, at all times during the period beginning with the date of grant of the X option and ending with the date of exercise of the M option, A was an employee of the corporation granting the option or substituting or assuming the option under §1.424-1(a).
1.421-1(h)(4) Example 3 . segunda oración
1.421-1(h)(4) Example 3 . third, fourth, and fifth sentences
1.421-1(h)(4) Example 4, first sentence
1.421-1(h)(4) Example 5 . first sentence
1.421-1(h)(4) Example 6 . first sentence
an employment contract with M which provides that upon the termination of any military duty E may be required to serve, E will be entitled to reemployment with M or a parent or subsidiary of M.
a right to reemployment with M or a related corporation on the termination of any military duty E may be required to serve.
1.421-1(h)(4) Example 6 . third sentence
of M or a related corporation
1.421-1(h)(4) Example 6 . last sentence
1.421-1(h)(4) Example 7 . first and last sentences
a qualified stock
1.421-1(h)(4) Example 7 . first sentence
parent or subsidiary
1.421-1(h)(4) Example 7 . last sentence
its parent and subsidiary corporation
1.421-1(h)(4) Example 7 . last sentence
25. Revising paragraph (i).
26. Adding paragraph (j).
The additions and revisions read as follows:
§1.421-1 Meaning and use of certain terms.
(a) * * * (1) * * * While no particular form of words is necessary, the option must express, among other things, an offer to sell at the option price, the maximum number of shares purchasable under the option, and the period of time during which the offer remains open. The term option includes a warrant that meets the requirements of this paragraph (a)(1).
(3) An option must be in writing (in paper or electronic form), provided that such writing is adequate to establish an option right or privilege that is enforceable under applicable law.
(b) Statutory options . (1) The term statutory option . for purposes of this section and §§1.421-2 through 1.424-1, means an incentive stock option . as defined in §1.422-2(a), or an option granted under an employee stock purchase plan . as defined in §1.423-2.
(2) An option qualifies as a statutory option only if the option is not transferable (other than by will or by the laws of descent and distribution) by the individual to whom the option was granted, and is exercisable, during the lifetime of such individual, only by such individual. See §§1.422-2(a)(2)(v) and 1.423-2(j). Accordingly, an option which is transferable or transferred by the individual to whom the option is granted during such individual’s lifetime, or is exercisable during such individual’s lifetime by another person, is not a statutory option. However, if the option or the plan under which the option was granted contains a provision permitting the individual to designate the person who may exercise the option after such individual’s death, neither such provision, nor a designation pursuant to such provision, disqualifies the option as a statutory option. A pledge of the stock purchasable under an option as security for a loan that is used to pay the option price does not cause the option to violate the nontransferability requirements of this paragraph (b). Also, the transfer of an option to a trust does not disqualify the option as a statutory option if, under section 671 and applicable State law, the individual is considered the sole beneficial owner of the option while it is held in the trust. If an option is transferred incident to divorce (within the meaning of section 1041) or pursuant to a domestic relations order, the option does not qualify as a statutory option as of the day of such transfer. For the treatment of nonstatutory options, see §1.83-7.
Example 1 . * * * Because X was a subsidiary of P on the date of the grant of the statutory option, the option does not fail to be a statutory option even though X ceases to be a subsidiary of P.
Ejemplo 2. * * * Because X was not a subsidiary of S or P on the date of the grant of the option, the option is not a statutory option even though X later becomes a subsidiary of P. See §§1.422-2(a)(2) and 1.423-2(b).
(c) Time and date of granting option . (1) For purposes of this section and §§1.421-2 through 1.424-1, the language “the date of the granting of the option” and “the time such option is granted,” and similar phrases refer to the date or time when the granting corporation completes the corporate action constituting an offer of stock for sale to an individual under the terms and conditions of a statutory option. A corporate action constituting an offer of stock for sale is not considered complete until the date on which the maximum number of shares that can be purchased under the option and the minimum option price are fixed or determinable. Unesdoc. unesco. org unesdoc. unesco. org
(d) Stock and voting stock . (1) For purposes of this section and §§1.421-2 through 1.424-1, the term stock means capital stock of any class, including voting or nonvoting common or preferred stock. Except as otherwise provided, the term includes both treasury stock and stock of original issue. Special classes of stock authorized to be issued to and held by employees are within the scope of the term stock as used in such sections, provided such stock otherwise possesses the rights and characteristics of capital stock.
(2) For purposes of determining what constitutes voting stock in ascertaining whether a plan has been approved by stockholders under §1.422-2(b) or 1.423-2(c) or whether the limitations pertaining to voting power contained in §§1.422-2(f) and 1.423-2(d) have been met, stock which does not have voting rights until the happening of an event, such as the default in the payment of dividends on preferred stock, is not voting stock until the happening of the specified event. Generally, stock which does not possess a general voting power, and may vote only on particular questions, is not voting stock. However, if such stock is entitled to vote on whether a stock option plan may be adopted, it is voting stock.
(3) In general, for purposes of this section and §§1.421-2 through 1.424-1, ownership interests other than capital stock are considered stock.
(e) Option price . (1) For purposes of this section and §§1.421-2 through 1.424-1, the term option price . price paid under the option . or exercise price means the consideration in cash or property which, pursuant to the terms of the option, is the price at which the stock subject to the option is purchased. The term option price does not include any amounts paid as interest under a deferred payment arrangement or treated as interest.
(2) Any reasonable valuation method may be used to determine whether, at the time the option is granted, the option price satisfies the pricing requirements of sections 422(b)(4), 422(c)(5), 422(c)(7), and 423(b)(6) with respect to the stock subject to the option. Such methods include, for example, the valuation method described in §20.2031-2 of this chapter (Estate Tax Regulations).
(f) Exercise . * * * An agreement or undertaking by the employee to make payments under a stock purchase plan does not constitute the exercise of an option to the extent the payments made remain subject to withdrawal by or refund to the employee.
(g) Transfer . * * *For purposes of section 422, a transfer may occur even if a share of stock is subject to a substantial risk of forfeiture or is not otherwise transferable immediately after the date of exercise. See §1.422-1(b)(3) Example 2 . A transfer does not fail to occur merely because, under the terms of the arrangement, the individual may not dispose of the share for a specified period of time, or the share is subject to a right of first refusal or a right to reacquire the share at the share’s fair market value at the time of sale.
(h) Employment relationship . (1) An option is a statutory option only if, at the time the option is granted, the optionee is an employee of the corporation granting the option, or a related corporation of such corporation. If the option has been assumed or a new option has been substituted in its place under §1.424-1(a), the optionee must, at the time of such substitution or assumption, be an employee (or a former employee within the 3-month period following termination of the employment relationship) of the corporation so substituting or assuming the option, or a related corporation of such corporation. The determination of whether the optionee is an employee at the time the option is granted (or at the time of the substitution or assumption under §1.424-1(a)) is made in accordance with section 3401(c) and the regulations thereunder.* * *
(2) In addition, §1.421-2(a) is applicable to the transfer of a share pursuant to the exercise of the statutory option only if the optionee is, at all times during the period beginning with the date of the granting of such option and ending on the day 3 months before the date of such exercise, an employee of either the corporation granting such option, a related corporation of such corporation, or a corporation (or a related corporation of such corporation) substituting or assuming a stock option in a transaction to which §1.424-1(a) applies. For purposes of the preceding sentence, the employment relationship is treated as continuing intact while the individual is on military leave, sick leave, or other bona fide leave of absence (such as temporary employment by the Government) if the period of such leave does not exceed 3 months, or if longer, so long as the individual’s right to reemployment with the corporation granting the option (or a related corporation of such corporation) or a corporation (or a related corporation of such corporation) substituting or assuming a stock option in a transaction to which §1.424-1(a) applies, is provided either by statute or by contract. If the period of leave exceeds 3 months and the individual’s right to reemployment is not provided either by statute or by contract, the employment relationship is deemed to terminate on the first day immediately following such three-month period. Thus, if the option is not exercised before such deemed termination of employment, §1.421-2(a) applies to the transfer of a share pursuant to an exercise of the option only if the exercise occurs within 3 months from the date the employment relationship is deemed terminated.
(i) Additional definitions . (1) Corporation . For purposes of this section and §§1.421-2 through 1.424-1, the term corporation has the meaning prescribed by section 7701(a)(3) and §301.7701-2(b) of this chapter. For example, a corporation for purposes of the preceding sentence includes an S corporation (as defined in section 1361), a foreign corporation (as defined in section 7701(a)(5)), and a limited liability company that is treated as a corporation for all Federal tax purposes.
(2) Parent corporation and subsidiary corporation . For the definition of the terms parent corporation (and parent ) and subsidiary corporation (and subsidiary ), for purposes of this section and §§1.421-2 through 1.424-1, see §1.424-1(f)(i) and (ii), respectively. Related corporation as used in this section and in §§1.421-2 through 1.424-1 means either a parent corporation or subsidiary corporation.
(j) Effective date — (1) In general . These regulations are effective on August 3, 2004.
(2) Reliance and transition period . For statutory options granted on or before June 9, 2003, taxpayers may rely on the 1984 proposed regulations LR-279-81 (49 FR 4504), the 2003 proposed regulations REG-122917-02 (68 FR 34344), or this section until the earlier of January 1, 2006, or the first regularly scheduled stockholders meeting of the granting corporation occurring 6 months after August 3, 2004. For statutory options granted after June 9, 2003, and before the earlier of January 1, 2006, or the first regularly scheduled stockholders meeting of the granting corporation occurring at least 6 months after August 3, 2004, taxpayers may rely on either the REG-122917-02 or this section. Taxpayers may not rely on LR-279-81 or REG-122917-02 after December 31, 2005. Reliance on LR-279-81, REG-122917-02, or this section must be in its entirety, and all statutory options granted during the reliance period must be treated consistently.
Par. 4. Section 1.421-8 is re-designated as 1.421-2 and is amended by:
1. Revising paragraphs (a)(1), (b), and (c)(1).
2. In paragraph (c)(2), first sentence, add the phrase “for purposes of section 423(c)” at the end of the first sentence.
3. In the list below, for each section indicated in the left column, remove the language in the middle column and add the language in the right column:
(a) Effect of qualifying transfer . (1) If a share of stock is transferred to an individual pursuant to the individual’s exercise of a statutory option, and if the requirements of §1.422-1(a) (relating to incentive stock options) or §1.423-1(a) (relating to employee stock purchase plans) whichever is applicable, are met, then—
(i) No income results under section 83 at the time of the transfer of such share to the individual upon the exercise of the option with respect to such share;
(ii) No deduction under sections 83(h) or 162 or the regulations thereunder (relating to trade or business expenses) is allowable at any time with respect to the share so transferred; y
(iii) No amount other than the price paid under the option is considered as received by the employer corporation, a related corporation of such corporation, or a corporation substituting or assuming a stock option in a transaction to which §1.424-1(a) (relating to corporate reorganizations, liquidations, etc.) applies, for the share so transferred.
(b) Effect of disqualifying disposition . (1)(i) The disposition (as defined in §1.424-1(c)) of a share of stock acquired by the exercise of a statutory option before the expiration of the applicable holding periods as determined under §1.422-1(a) or 1.423-1(a) is a disqualifying disposition and makes paragraph (a) of this section inapplicable to the transfer of such share. See section 83(a) to determine the amount includible on a disqualifying disposition. The income attributable to such transfer (determined without reduction for any brokerage fees or other costs paid in connection with the disposition) is treated by the individual as compensation income received in the taxable year in which such disqualifying disposition occurs. A deduction attributable to such transfer is allowable, to the extent otherwise allowable under section 162, for the taxable year in which such disqualifying disposition occurs to the employer corporation, or a related corporation of such corporation, or a corporation substituting or assuming an option in a transaction to which §1.424-1(a) applies. Additionally, the amount allowed as a deduction must be determined as if the requirements of section 83(h) and §1.83-6(a) apply. No amount is treated as income, and no amount is allowed as a deduction, for any taxable year other than the taxable year in which the disqualifying disposition occurs. If the amount realized on the disposition exceeds (or is less than) the sum of the amount paid for the share and the amount of compensation income recognized as a result of such disposition, the extent to which the difference is treated as gain (or loss) is determined under the rules of section 302 or 1001, as applicable.
(ii) The following examples illustrate the principles of this paragraph (b):
Example 1 . On June 1, 2006, X Corporation grants an incentive stock option to A, an employee of X, entitling A to purchase 100 shares of X stock at $10 per share. On August 1, 2006, A exercises the option when the fair market value of X stock is $20 per share, and 100 shares of X stock are transferred to A on that date. On December 15, 2007, A sells the stock for $20 per share. Because A disposed of the stock before June 2, 2008, A did not satisfy the holding period requirements of §1.422-1(a). Under paragraph (b)(1)(i) of this section, A therefore made a disqualifying disposition of the stock. Thus, paragraph (a) of this section is inapplicable to the transfer of the shares, and A must include the compensation income attributable to the transfer of the shares in gross income in the year of the disqualifying disposition. The amount of compensation income A must include in income is $1,000 ($2,000, the fair market value of X stock on transfer less $1,000, the exercise price per share). If the requirements of §83(h) and §1.83-6(a) are satisfied and otherwise allowable under section 162, X is allowed a deduction of $1,000 for its taxable year in which the disqualifying disposition occurs.
Ejemplo 2. Y Corporation grants an incentive stock option for 100 shares of its stock to E, an employee of Y. The option has an exercise price of $10 per share. E exercises the option and is transferred the shares when the fair market value of a share of Y stock is $30. Before the applicable holding periods are met, Y redeems the shares for $70 per share. Because the holding period requirements of §1.422-1(a) are not met, the redemption of the shares is a disqualifying disposition of the shares. Under paragraph (b)(1)(i) of this section, A made a disqualifying disposition of the stock. Thus, paragraph (a) of this section is inapplicable to the transfer of the shares, and E must include the compensation income attributable to the transfer of the shares in gross income in the year of the disqualifying disposition. The amount of compensation income that E must include in income is $2,000 ($3,000, the fair market value of Y stock on transfer, less $1,000, the exercise price paid by E). The character of the additional gain that is includible in E’s income as a result of the redemption is determined under the rules of section 302. If the requirements of §83(h) and §1.83-6(a) are satisfied and otherwise allowable under section 162, Y is allowed a deduction for the taxable year in which the disqualifying disposition occurs for the compensation income of $2,000. Y is not allowed a deduction for the additional gain includible in E’s income as a result of the redemption.
(2) If an optionee transfers stock acquired through the optionee’s exercise of a statutory option prior to the expiration of the applicable holding periods, paragraph (a) of this section continues to apply to the transfer of the stock pursuant to the exercise of the option if such transfer is not a disposition of the stock as defined in §1.424-1(c) (for example, a transfer from a decedent to the decedent’s estate or a transfer by bequest or inheritance). Similarly, a subsequent transfer by the executor, administrator, heir, or legatee is not a disqualifying disposition by the decedent. If a statutory option is exercised by the estate of the optionee or by a person who acquired the option by bequest or inheritance or by reason of the death of such optionee, see paragraph (c) of this section. If a statutory option is exercised by the individual to whom the option was granted and the individual dies before the expiration of the holding periods, see paragraph (d) of this section.
(3) For special rules relating to the disqualifying disposition of a share of stock acquired by exercise of an incentive stock option, see §§1.422-5(b)(2) and 1.424-1(c)(3).
(c) Exercise by estate . (1) If a statutory option is exercised by the estate of the individual to whom the option was granted (or by any person who acquired such option by bequest or inheritance or by reason of the death of such individual), paragraph (a) of this section applies to the transfer of stock pursuant to such exercise in the same manner as if the option had been exercised by the deceased optionee. Consequently, neither the estate nor such person is required to include any amount in gross income as a result of a transfer of stock pursuant to the exercise of the option. Paragraph (a) of this section applies even if the executor, administrator, or such person disposes of the stock so acquired before the expiration of the applicable holding periods as determined under §1.422-1(a) or 1.423-1(a). This special rule does not affect the applicability of section 423(c), relating to the estate’s or other qualifying person’s recognition of compensation income, or section 1222, relating to what constitutes a short-term and long-term capital gain or loss. Paragraph (a) of this section also applies even if the executor, administrator, or such person does not exercise the option within three months after the death of the individual or is not employed as described in §1.421-1(h), either when the option is exercised or at any time. However, paragraph (a) of this section does not apply to a transfer of shares pursuant to an exercise of the option by the estate or by such person unless the individual met the employment requirements described in §1.421-1(h) either at the time of the individual’s death or within three months before such time (or, if applicable, within the period described in §1.422-1(a)(3)).Additionally, paragraph (a) of this section does not apply if the option is exercised by a person other than the executor or administrator, or other than a person who acquired the option by bequest or inheritance or by reason of the death of such deceased individual. For example, if the option is sold by the estate, paragraph (a) of this section does not apply to the transfer of stock pursuant to an exercise of the option by the buyer, but if the option is distributed by the administrator to an heir as part of the estate, paragraph (a) of this section applies to the transfer of stock pursuant to an exercise of the option by such heir.
(d) Option exercised by the individual to whom the option was granted if the individual dies before expiration of the applicable holding periods . If a statutory option is exercised by the individual to whom the option was granted and such individual dies before the expiration of the applicable holding periods as determined under §1.422-1(a) or 1.423-1(a), paragraph (a) of this section does not become inapplicable if the executor or administrator of the estate of such individual, or any person who acquired such stock by bequest or inheritance or by reason of the death of such individual, disposes of such stock before the expiration of such applicable holding periods. This rule does not affect the applicability of section 423(c), relating to the individual’s recognition of compensation income, or section 1222, relating to what constitutes a short-term and long-term capital gain or loss.
(f) Effective date — (1) In general . These regulations are effective on August 3, 2004.
(2) Reliance and transition period . For statutory options granted on or before June 9, 2003, taxpayers may rely on the 1984 proposed regulations LR-279-81 (49 FR 4504), the 2003 proposed regulations REG-122917-02 (68 FR 34344), or this section until the earlier of January 1, 2006, or the first regularly scheduled stockholders meeting of the granting corporation occurring 6 months after August 3, 2004. For statutory options granted after June 9, 2003, and before the earlier of January 1, 2006, or the first regularly scheduled stockholders meeting of the granting corporation occurring at least 6 months after August 3, 2004, taxpayers may rely on either the REG-122917-02 or this section. Taxpayers may not rely on LR-279-81 or REG-122917-02 after December 31, 2005. Reliance on LR-279-81, REG-122917-02, or this section must be in its entirety, and all statutory options granted during the reliance period must be treated consistently.
Par. 5. Section 1.422-1 is added to read as follows:
§1.422-1 Incentive stock options; general rules.
(a) Applicability of section 421(a) . (1)(i) Section 1.421-2(a) applies to the transfer of a share of stock to an individual pursuant to the individual’s exercise of an incentive stock option if the following conditions are satisfied—
(A) The individual makes no disposition of such share before the later of the expiration of the 2-year period from the date of grant of the option pursuant to which such share was transferred, or the expiration of the 1-year period from the date of transfer of such share to the individual; y
(B) At all times during the period beginning on the date of grant of the option and ending on the day 3 months before the date of exercise, the individual was an employee of either the corporation granting the option, a related corporation of such corporation, or a corporation (or a related corporation of such corporation) substituting or assuming a stock option in a transaction to which §1.424-1(a) applies.
(ii) For rules relating to the disposition of shares of stock acquired pursuant to the exercise of a statutory option, see §1.424-1(c). For rules relating to the requisite employment relationship, see §1.421-1(h).
(2)(i) The holding period requirement of section 422(a)(1), described in paragraph (a)(1)(i)(A) of this section, does not apply to the transfer of shares by an insolvent individual described in this paragraph (a)(2). If an insolvent individual holds a share of stock acquired pursuant to the individual’s exercise of an incentive stock option, and if such share is transferred to a trustee, receiver, or other similar fiduciary in any proceeding under the Bankruptcy Act or any other similar insolvency proceeding, neither such transfer, nor any other transfer of such share for the benefit of the individual’s creditors in such proceeding is a disposition of such share for purposes of this paragraph (a). For purposes of this paragraph (a)(2), an individual is insolvent only if the individual’s liabilities exceed the individual’s assets or the individual is unable to satisfy the individual’s liabilities as they become due. See section 422(c)(3).
(ii) A transfer by the trustee or other fiduciary that is not treated as a disposition for purposes of this paragraph (a) may be a sale or exchange for purposes of recognizing capital gain or loss with respect to the share transferred. For example, if the trustee transfers the share to a creditor in an insolvency proceeding, capital gain or loss must be recognized by the insolvent individual to the extent of the difference between the amount realized from such transfer and the adjusted basis of such share.
(iii) If any transfer by the trustee or other fiduciary (other than a transfer back to the insolvent individual) is not for the exclusive benefit of the creditors in an insolvency proceeding, then whether such transfer is a disposition of the share by the individual for purposes of this paragraph (a) is determined under §1.424-1(c). Similarly, if the trustee or other fiduciary transfers the share back to the insolvent individual, any subsequent transfer of the share by such individual which is not made in respect of the insolvency proceeding may be a disposition of the share for purposes of this paragraph (a).
(3) If the employee exercising an option ceased employment because of permanent and total disability, within the meaning of section 22(e)(3), 1 year is used instead of 3 months in the employment period requirement of paragraph (a)(1)(i)(B) of this section.
(b) Failure to satisfy holding period requirements —(1) General rule . For general rules concerning a disqualifying disposition of a share of stock acquired pursuant to the exercise of an incentive stock option, see §1.421-2(b)(1).
(2)(i) Special rule . If an individual makes a disqualifying disposition of a share of stock acquired by the exercise of an incentive stock option, and if such disposition is a sale or exchange with respect to which a loss (if sustained) would be recognized to the individual, then, under this paragraph (b)(2)(i), the amount includible (determined without reduction for brokerage fees or other costs paid in connection with the disposition) in the gross income of such individual, and deductible from the income of the employer corporation (or a related corporation of such corporation, or of a corporation substituting or assuming the option in a transaction to which §1.424-1(a) applies) as compensation attributable to the exercise of such option, shall not exceed the excess (if any) of the amount realized on such sale or exchange over the adjusted basis of such share. Subject to the special rule provided by this paragraph (b)(2)(i), the amount of compensation attributable to the exercise of the option is determined under section 83(a); see §1.421-2(b)(1)(i).
(ii) Limitation to special rule . The special rule described in paragraph (b)(2)(i) of this section does not apply if the disposition is a sale or exchange with respect to which a loss (if sustained) would not be recognized by the individual. Thus, for example, if a disqualifying disposition is a sale described in section 1091 (relating to loss from wash sales of stock or securities), a gift (or any other transaction which is not at arm’s length), or a sale described in section 267(a)(1) (relating to sales between related persons), the special rule described in paragraph (b)(2)(i) of this section does not apply because a loss sustained in any such transaction would not be recognized.
(3) Examples . The following examples illustrate the principles of this paragraph (b):
Example 1 . Disqualifying disposition of vested stock . On June 1, 2006, X Corporation grants an incentive stock option to A, an employee of X Corporation, entitling A to purchase one share of X Corporation stock. On August 1, 2006, A exercises the option, and the share of X Corporation stock is transferred to A on that date. The option price is $100 (the fair market value of a share of X Corporation stock on June 1, 2006), and the fair market value of a share of X Corporation stock on August 1, 2006 (the date of transfer), is $200. The share transferred to A is transferable and not subject to a substantial risk of forfeiture. A makes a disqualifying disposition by selling the share on June 1, 2007, for $250. The amount of compensation attributable to A’s exercise is $100 (the difference between the fair market value of the share at the date of transfer, $200, and the amount paid for the share, $100). Because the amount realized ($250) is greater than the value of the share at transfer ($200), paragraph (b)(2)(i) of this section does not apply and thus does not affect the amount includible as compensation in A’s gross income and deductible by X. A must include in gross income for the taxable year in which the sale occurred $100 as compensation and $50 as capital gain ($250, the amount realized from the sale, less A’s basis of $200 (the $100 paid for the share plus the $100 increase in basis resulting from the inclusion of that amount in A’s gross income as compensation attributable to the exercise of the option)). If the requirements of section 83(h) and §1.83-6(a) are satisfied and the deduction is otherwise allowable under section 162, for its taxable year in which the disqualifying disposition occurs, X Corporation is allowed a deduction of $100 for compensation attributable to A’s exercise of the incentive stock option.
Ejemplo 2. Disqualifying disposition of unvested stock . Assume the same facts as in Example 1 . except that the share of X Corporation stock received by A is subject to a substantial risk of forfeiture and not transferable for a period of six months after such exercise. Assume further that the fair market value of X Corporation stock is $225 on February 1, 2007, the date on which the six-month restriction lapses. Because section 83 does not apply for ordinary income tax purposes on the date of exercise, A cannot make an effective section 83(b) election at that time (although such an election is permissible for alternative minimum tax purposes). Additionally, at the time of the disposition, section 422 and §1.422-1(a) no longer apply, and thus, section 83(a) is used to measure the consequences of the disposition, and the holding period for capital gain purposes begins on the vesting date, six months earlier. The amount of compensation attributable to A’s exercise of the option and disqualifying disposition of the share is $125 (the difference between the fair market value of the share on the date that the restriction lapsed, $225, and the amount paid for the share, $100). Because the amount realized ($225) is greater than the value of the share at transfer ($200), paragraph (b)(2)(i) of this section does not apply and thus does not affect the amount includible as compensation in A’s gross income and deductible by X. A must include $125 of compensation income and $25 of capital gain in gross income for the taxable year in which the disposition occurs ($250, the amount realized from the sale, less A’s basis of $225 (the $100 paid for the share plus the $125 increase in basis resulting from the inclusion of that amount of compensation in A’s gross income)). If the requirements of section 83(h) and §1.83-6(a) are satisfied and the deduction is otherwise allowable under section 162, for its taxable year in which the disqualifying disposition occurs, X Corporation is allowed a deduction of $125 for the compensation attributable to A’s exercise of the option.
Example 3 . (i) Disqualifying disposition and application of special rule . Assume the same facts as in Example 1 . except that A sells the share for $150 to M.
(ii) If the sale to M is a disposition that meets the requirements of paragraph (b)(2)(i) of this section, instead of $100 which otherwise would have been includible as compensation under §1.83-7, under paragraph (b)(2)(i) of this section, A must include only $50 (the excess of the amount realized on such sale, $150, over the adjusted basis of the share, $100) in gross income as compensation attributable to the exercise of the incentive stock option. Because A’s basis for the share is $150 (the $100 which A paid for the share, plus the $50 increase in basis resulting from the inclusion of that amount in A’s gross income as compensation attributable to the exercise of the option), A realizes no capital gain or loss as a result of the sale. If the requirements of section 83(h) and §1.83-6(a) are satisfied and the deduction is otherwise allowable under section 162, for its taxable year in which the disqualifying disposition occurs, X Corporation is allowed a deduction of $50 for the compensation attributable to A’s exercise of the option and disqualifying disposition of the share.
(iii) Assume the same facts as in paragraph (i) of this Example 3 . except that 10 days after the sale to M, A purchases substantially identical stock. Because under section 1091(a) a loss (if it were sustained on the sale) would not be recognized on the sale, under paragraph (b)(2)(ii) of this section, the special rule described in paragraph (b)(2)(i) of this section does not apply. A must include $100 (the difference between the fair market value of the share on the date of transfer, $200, and the amount paid for the share, $100) in gross income as compensation attributable to the exercise of the option for the taxable year in which the disqualifying disposition occurred. A recognizes no capital gain or loss on the transaction. If the requirements of section 83(h) and §1.83-6(a) are satisfied and the deduction is otherwise allowable under section 162, for its taxable year in which the disqualifying disposition occurs X Corporation is allowed a $100 deduction for compensation attributable to A’s exercise of the option and disqualifying disposition of the share.
(iv) Assume the same facts as in paragraph (ii) of this Example 3 . except that A sells the share for $50. Under paragraph (b)(2)(i) of this section, A is not required to include any amount in gross income as compensation attributable to the exercise of the option. A is allowed a capital loss of $50 (the difference between the amount realized on the sale, $50, and the adjusted basis of the share, $100). X Corporation is not allowed any deduction attributable to A’s exercise of the option and disqualifying disposition of the share.
(c) Failure to satisfy employment requirement . Section 1.421-2(a) does not apply to the transfer of a share of stock pursuant to the exercise of an incentive stock option if the employment requirement, as determined under paragraph (a)(1)(i)(B) of this section, is not met at the time of the exercise of such option. Consequently, the effects of such a transfer are determined under the rules of §1.83-7.For rules relating to the employment relationship, see §1.421-1(h).
Par. 6. Section 1.422-2 is added to read as follows:
§1.422-2 Incentive stock options defined.
(a) Incentive stock option defined —(1) In general . The term incentive stock option means an option that meets the requirements of paragraph (a)(2) of this section on the date of grant. An incentive stock option is also subject to the $100,000 limitation described in §1.422-4. An incentive stock option may contain a number of permissible provisions that do not affect the status of the option as an incentive stock option. See §1.422-5 for rules relating to permissible provisions of an incentive stock option.
(2) Option requirements . To qualify as an incentive stock option under this section, an option must be granted to an individual in connection with the individual’s employment by the corporation granting such option (or by a related corporation as defined in §1.421-1(i)(2)), and granted only for stock of any of such corporations. In addition, the option must meet all of the following requirements—
(i) It must be granted pursuant to a plan that meets the requirements described in paragraph (b) of this section;
(ii) It must be granted within 10 years from the date of the adoption of the plan or the date such plan is approved by the stockholders, whichever is earlier (see paragraph (c) of this section);
(iii) It must not be exercisable after the expiration of 10 years from the date of grant (see paragraph (d) of this section);
(iv) It must provide that the option price per share is not less than the fair market value of the share on the date of grant (see paragraph (e) of this section);
(v) By its terms, it must not be transferrable by the individual to whom the option is granted other than by will or the laws of descent and distribution, and must be exercisable, during such individual’s lifetime, only by such individual (see §§1.421-1(b)(2) and 1.421-2(c)); y
(vi) Except as provided in paragraph (f) of this section, it must be granted to an individual who, at the time the option is granted, does not own stock possessing more than 10 percent of the total combined voting power of all classes of stock of the corporation employing such individual or of any related corporation of such corporation.
(3) Amendment of option terms . Except as otherwise provided in §1.424-1, the amendment of the terms of an incentive stock option may cause it to cease to be an option described in this section. If the terms of an option that has lost its status as an incentive stock option are subsequently changed with the intent to re-qualify the option as an incentive stock option, such change results in the grant of a new option on the date of the change. See §1.424-1(e).
(4) Terms provide option not an incentive stock option . If the terms of an option, when granted, provide that it will not be treated as an incentive stock option, such option is not treated as an incentive stock option.
(b) Option plan —(1) In general . An incentive stock option must be granted pursuant to a plan that meets the requirements of this paragraph (b). The authority to grant other stock options or other stock-based awards pursuant to the plan, where the exercise of such other options or awards does not affect the exercise of incentive stock options granted pursuant to the plan, does not disqualify such incentive stock options. The plan must be in writing or electronic form, provided that such writing or electronic form is adequate to establish the terms of the plan. See §1.422-5 for rules relating to permissible provisions of an incentive stock option.
(2) Stockholder approval . (i) The plan required by this paragraph (b) must be approved by the stockholders of the corporation granting the incentive stock option within 12 months before or after the date such plan is adopted. Ordinarily, a plan is adopted when it is approved by the granting corporation’s board of directors, and the date of the board’s action is the reference point for determining whether stockholder approval occurs within the applicable 24-month period. However, if the board’s action is subject to a condition (such as stockholder approval) or the happening of a particular event, the plan is adopted on the date the condition is met or the event occurs, unless the board’s resolution fixes the date of approval as the date of the board’s action.
(ii) For purposes of paragraph (b)(2)(i) of this section, the stockholder approval must comply with the rules described in §1.422-3.
(iii) The provisions relating to the maximum aggregate number of shares to be issued under the plan (described in paragraph (b)(3) of this section) and the employees (or class or classes of employees) eligible to receive options under the plan (described in paragraph (b)(4) of this section) are the only provisions of a stock option plan that, if changed, must be re-approved by stockholders for purposes of section 422(b)(1). Any increase in the maximum aggregate number of shares that may be issued under the plan (other than an increase merely reflecting a change in the number of outstanding shares, such as a stock dividend or stock split), or change in the designation of the employees (or class or classes of employees) eligible to receive options under the plan is considered the adoption of a new plan requiring stockholder approval within the prescribed 24-month period. In addition, a change in the granting corporation or the stock available for purchase or award under the plan is considered the adoption of a new plan requiring new stockholder approval within the prescribed 24-month period. Any other changes in the terms of an incentive stock option plan are not considered the adoption of a new plan and, thus, do not require stockholder approval.
(3) Maximum aggregate number of shares . (i) The plan required by this paragraph (b) must designate the maximum aggregate number of shares that may be issued under the plan through incentive stock options. If nonstatutory options or other stock-based awards may be granted, the plan may separately designate terms for each type of option or other stock-based awards and designate the maximum number of shares that may be issued under such option or other stock-based awards. Unless otherwise specified, all terms of the plan apply to all options and other stock-based awards that may be granted under the plan.
(ii) A plan that merely provides that the number of shares that may be issued as incentive stock options under such plan may not exceed a stated percentage of the shares outstanding at the time of each offering or grant under such plan does not satisfy the requirement that the plan state the maximum aggregate number of shares that may be issued under the plan. However, the maximum aggregate number of shares that may be issued under the plan may be stated in terms of a percentage of the authorized, issued, or outstanding shares at the date of the adoption of the plan. The plan may specify that the maximum aggregate number of shares available for grants under the plan may increase annually by a specified percentage of the authorized, issued, or outstanding shares at the date of the adoption of the plan. A plan which provides that the maximum aggregate number of shares that may be issued as incentive stock options under the plan may change based on any other specified circumstances satisfies the requirements of this paragraph (b)(3) only if the stockholders approve an immediately determinable maximum aggregate number of shares that may be issued under the plan in any event.
(iii) It is permissible for the plan to provide that, shares purchasable under the plan may be supplied to the plan through acquisitions of stock on the open market; shares purchased under the plan and forfeited back to the plan; shares surrendered in payment of the exercise price of an option; shares withheld for payment of applicable employment taxes and/or withholding obligations resulting from the exercise of an option.
(iv) If there is more than one plan under which incentive stock options may be granted and stockholders of the granting corporation merely approve a maximum aggregate number of shares that are available for issuance under such plans, the stockholder approval requirements described in paragraph (b)(2) of this section are not satisfied. A separate maximum aggregate number of shares available for issuance pursuant to incentive stock options must be approved for each plan.
(4) Designation of employees . The plan described in this paragraph (b), as adopted and approved, must indicate the employees (or class or classes of employees) eligible to receive the options or other stock-based awards to be granted under the plan. This requirement is satisfied by a general designation of the employees (or the class or classes of employees) eligible to receive options or other stock-based awards under the plan. Designations such as “key employees of the grantor corporation”; “all salaried employees of the grantor corporation and its subsidiaries, including subsidiaries which become such after adoption of the plan;” or “all employees of the corporation” meet this requirement. Este requisito se considera satisfecho a pesar de que el consejo de administración, otro grupo o un individuo tiene la autoridad para seleccionar a los empleados particulares que van a recibir opciones u otros premios basados en acciones de una clase descrita y para determinar el número de acciones a Ser opcionales o otorgados a cada uno de dichos empleados. If individuals other than employees may be granted options or other stock-based awards under the plan, the plan must separately designate the employees or classes of employees eligible to receive incentive stock options.
(5) Conflicting option terms . An option on stock available for purchase or grant under the plan is treated as having been granted pursuant to a plan even if the terms of the option conflict with the terms of the plan, unless such option is granted to an employee who is ineligible to receive options under the plan, options have been granted on stock in excess of the aggregate number of shares which may be issued under the plan, or the option provides otherwise.
(6) The following examples illustrate the principles of this paragraph (b):
Example 1 . Stockholder approval . (i) S Corporation is a subsidiary of P Corporation, a publicly traded corporation. On January 1, 2006, S adopts a plan under which incentive stock options for S stock are granted to S employees.
(ii) To meet the requirements of paragraph (b)(2) of this section, the plan must be approved by the stockholders of S (in this case, P) within 12 months before or after January 1, 2006.
(iii) Assume the same facts as in paragraph (i) of this Example 1 . Assume further that the plan was approved by the stockholders of S (in this case, P) on March 1, 2006. On January 1, 2008, S changes the plan to provide that incentive stock options for P stock will be granted to S employees under the plan. Because there is a change in the stock available for grant under the plan, the change is considered the adoption of a new plan that must be approved by the stockholders of P within 12 months before or after January 1, 2008.
Ejemplo 2. Stockholder approval . (i) Assume the same facts as in paragraph (i) of Example 1 . except that on March 15, 2007, P completely disposes of its interest in S. Thereafter, S continues to grant options for S stock to S employees under the plan.
(ii) The new S options are granted under a plan that meets the stockholder approval requirements of paragraph (b)(2) of this section without regard to whether S seeks approval of the plan from the stockholders of S after P disposes of its interest in S.
(iii) Assume the same facts as in paragraph (i) of this Example 2 . except that under the plan as adopted on January 1, 2006, only options for P stock are granted to S employees. Assume further that after P disposes of its interest in S, S changes the plan to provide for the grant of options for S stock to S employees. Because there is a change in the stock available for purchase or grant under the plan, under paragraph (b)(2)(iii) of this section, the stockholders of S must approve the plan within 12 months before or after the change to the plan to meet the stockholder approval requirements of paragraph (b) of this section.
Example 3 . Stockholder approval .(i) Corporation X maintains a plan under which incentive stock options may be granted to all eligible employees. Corporation Y does not maintain an incentive stock option plan. On May 15, 2006, Corporation X and Corporation Y consolidate under state law to form one corporation. The new corporation will be named Corporation Y. The consolidation agreement describes the Corporation X plan, including the maximum aggregate number of shares available for issuance pursuant to incentive stock options after the consolidation and the employees eligible to receive options under the plan. Additionally, the consolidation agreement states that the plan will be continued by Corporation Y after the consolidation and incentive stock options will be issued by Corporation Y. The consolidation agreement is unanimously approved by the shareholders of Corporations X and Y on May 1, 2006. Corporation Y assumes the plan formerly maintained by Corporation X and continues to grant options under the plan to all eligible employees.
(ii) Because there is a change in the granting corporation (from Corporation X to Corporation Y), under paragraph (b)(2)(iii) of this section, Corporation Y is considered to have adopted a new plan. Because the plan is fully described in the consolidation agreement, including the maximum aggregate number of shares available for issuance pursuant to incentive stock options and employees eligible to receive options under the plan, the approval of the consolidation agreement by the shareholders constitutes approval of the plan. Thus, the shareholder approval of the consolidation agreement satisfies the shareholder approval requirements of paragraph (b)(2) of this section, and the plan is considered to be adopted by Corporation Y and approved by its shareholders on May 1, 2006.
Example 4 . Maximum aggregate number of shares . X Corporation maintains a plan under which statutory options and nonstatutory options may be granted. The plan designates the number of shares that may be used for incentive stock options. Because the maximum aggregate number of shares that will be used for incentive stock options is designated in the plan, the requirements of paragraph (b)(3) of this section are satisfied.
Example 5 . Maximum aggregate number of shares . Y Corporation adopts an incentive stock option plan on November 1, 2006. On that date, there are two million outstanding shares of Y Corporation stock. The plan provides that the maximum aggregate number of shares that may be issued under the plan may not exceed 15% of the outstanding number of shares of Y Corporation on November 1, 2006. Because the maximum aggregate number of shares that may be issued under the plan is designated in the plan, the requirements of paragraph (b)(3) of this section are met.
Example 6 . Maximum aggregate number of shares . (i) B Corporation adopts an incentive stock option plan on March 15, 2005. The plan provides that the maximum aggregate number of shares available for issuance under the plan is 50,000, increased on each anniversary date of the adoption of the plan by 5 percent of the then-outstanding shares.
(ii) Because the maximum aggregate number of shares is not designated under the plan, the requirements of paragraph (b)(3) of this section are not met.
(iii) Assume the same facts as in paragraph (i) of this Example 6 . except that the plan provides that the maximum aggregate number of shares available under the plan is the lesser of (a) 50,000 shares, increased each anniversary date of the adoption of the plan by 5 percent of the then-outstanding shares, or (b) 200,000 shares. Because the maximum aggregate number of shares that may be issued under the plan is designated as the lesser of one of two numbers, one of which provides an immediately determinable maximum aggregate number of shares that may be issued under the plan in any event, the requirements of paragraph (b)(3) of this section are met.
(c) Duration of option grants under the plan . An incentive stock option must be granted within 10 years from the date that the plan under which it is granted is adopted or the date such plan is approved by the stockholders, whichever is earlier. To grant incentive stock options after the expiration of the 10-year period, a new plan must be adopted and approved.
(d) Period for exercising options . An incentive stock option, by its terms, must not be exercisable after the expiration of 10 years from the date such option is granted, or 5 years from the date such option is granted to an employee described in paragraph (f) of this section. An option that does not contain such a provision when granted is not an incentive stock option.
(e) Option price . (1) Except as provided by paragraph (e)(2) of this section, the option price of an incentive stock option must not be less than the fair market value of the stock subject to the option at the time the option is granted. The option price may be determined in any reasonable manner, including the valuation methods permitted under §20.2031-2 of this chapter, so long as the minimum price possible under the terms of the option is not less than the fair market value of the stock on the date of grant. For general rules relating to the option price, see §1.421-1(e). For rules relating to the determination of when an option is granted, see §1.421-1(c).
(2)(i) If a share of stock is transferred to an individual pursuant to the exercise of an option which fails to qualify as an incentive stock option merely because there was a failure of an attempt, made in good faith, to meet the option price requirements of paragraph (e)(1) of this section, the requirements of such paragraph are considered to have been met. Whether there was a good-faith attempt to set the option price at not less than the fair market value of the stock subject to the option at the time the option was granted depends on the relevant facts and circumstances.
(ii) For publicly held stock that is actively traded on an established market at the time the option is granted, determining the fair market value of such stock by the appropriate method described in §20.2031-2 of this chapter establishes that a good-faith attempt to meet the option price requirements of this paragraph (e) was made.
(iii) For non-publicly traded stock, if it is demonstrated, for example, that the fair market value of the stock at the date of grant was based upon an average of the fair market values as of such date set forth in the opinions of completely independent and well-qualified experts, such a demonstration generally establishes that there was a good-faith attempt to meet the option price requirements of this paragraph (e). The optionee’s status as a majority or minority stockholder may be taken into consideration.
(iv) Regardless of whether the stock offered under an option is publicly traded, a good-faith attempt to meet the option price requirements of this paragraph (e) is not demonstrated unless the fair market value of the stock on the date of grant is determined with regard to nonlapse restrictions (as defined in §1.83-3(h)) and without regard to lapse restrictions (as defined in §1.83-3(i)).
(v) Amounts treated as interest and amounts paid as interest under a deferred payment arrangement are not includible as part of the option price. See §1.421-1(e)(1). An attempt to set the option price at not less than fair market value is not regarded as made in good faith where an adjustment of the option price to reflect amounts treated as interest results in the option price being lower than the fair market value on which the option price was based.
(3) Notwithstanding that the option price requirements of paragraphs (e)(1) and (2) of this section are satisfied by an option granted to an employee whose stock ownership exceeds the limitation provided by paragraph (f) of this section, such option is not an incentive stock option when granted unless it also complies with paragraph (f) of this section. If the option, when granted, does not comply with the requirements described in paragraph (f) of this section, such option can never become an incentive stock option, even if the employee’s stock ownership does not exceed the limitation of paragraph (f) of this section when such option is exercised.
(f) Options granted to certain stockholders . (1) If, immediately before an option is granted, an individual owns (or is treated as owning) stock possessing more than 10 percent of the total combined voting power of all classes of stock of the corporation employing the optionee or of any related corporation of such corporation, then an option granted to such individual cannot qualify as an incentive stock option unless the option price is at least 110 percent of the stock’s fair market value on the date of grant and such option by its terms is not exercisable after the expiration of 5 years from the date of grant. For purposes of determining the minimum option price for purposes of this paragraph (f), the rules described in paragraph (e)(2) of this section, relating to the good-faith determination of the option price, do not apply.
(2) For purposes of determining the stock ownership of the optionee, the stock attribution rules of §1.424-1(d) apply. Stock that the optionee may purchase under outstanding options is not treated as stock owned by the individual. The determination of the percentage of the total combined voting power of all classes of stock of the employer corporation (or of its related corporations) that is owned by the optionee is made with respect to each such corporation in the related group by comparing the voting power of the shares owned (or treated as owned) by the optionee to the aggregate voting power of all shares of each such corporation actually issued and outstanding immediately before the grant of the option to the optionee. The aggregate voting power of all shares actually issued and outstanding immediately before the grant of the option does not include the voting power of treasury shares or shares authorized for issue under outstanding options held by the individual or any other person.
(3) Examples . The rules of this paragraph (f) are illustrated by the following examples:
Example 1 . (i) E, an employee of M Corporation, owns 15,000 shares of M Corporation common stock, which is the only class of stock outstanding. M has 100,000 shares of its common stock outstanding. On January 1, 2005, when the fair market value of M stock is $100, E is granted an option with an option price of $100 and an exercise period of 10 years from the date of grant.
(ii) Because E owns stock possessing more than 10 percent of the total combined voting power of all classes of M Corporation stock, M cannot grant an incentive stock option to E unless the option is granted at an option price of at least 110 percent of the fair market value of the stock subject to the option and the option, by its terms, expires no later than 5 years from its date of grant. The option granted to E fails to meet the option-price and term requirements described in paragraph (f)(1) of this section and, thus, the option is not an incentive stock option.
(iii) Assume the same facts as in paragraph (i) of this Example 1 . except that E’s father and brother each owns 7,500 shares of M Corporation stock, and E owns no M stock in E’s own name. Because under the attribution rules of §1.424-1(d), E is treated as owning stock held by E’s parents and siblings, M cannot grant an incentive stock option to E unless the option price is at least 110 percent of the fair market value of the stock subject to the option, and the option, by its terms, expires no later than 5 years from the date of grant.
Ejemplo 2. Assume the same facts as in paragraph (i) of this Example 1 . Assume further that M is a subsidiary of P Corporation. Regardless of whether E owns any P stock and the number of P shares outstanding, if P Corporation grants an option to E which purports to be an incentive stock option, but which fails to meet the 110-percent-option-price and 5-year-term requirements, the option is not an incentive stock option because E owns more than 10 percent of the total combined voting power of all classes of stock of a related corporation of P Corporation ( i. e. . M Corporation). An individual who owns (or is treated as owning) stock in excess of the ownership specified in paragraph (f)(1) of this section, in any corporation in a group of corporations consisting of the employer corporation and its related corporations, cannot be granted an incentive stock option by any corporation in the group unless such option meets the 110-percent-option-price and 5-year-term requirements of paragraph (f)(1) of this section.
Example 3 . (i) F is an employee of R Corporation. R has only one class of stock, of which 100,000 shares are issued and outstanding. F owns no stock in R Corporation or any related corporation of R Corporation. On January 1, 2005, R grants a 10-year incentive stock option to F to purchase 50,000 shares of R stock at $3 per share, the fair market value of R stock on the date of grant of the option. On April 1, 2005, F exercises half of the January option and receives 25,000 shares of R stock that previously were not outstanding. On July 1, 2005, R grants a second 50,000 share option to F which purports to be an incentive stock option. The terms of the July option are identical to the terms of the January option, except that the option price is $3.25 per share, which is the fair market value of R stock on the date of grant of the July option.
(ii) Because F does not own more than 10% of the total combined voting power of all classes of stock of R Corporation or any related corporation on the date of the grant of the January option and the pricing requirements of paragraph (e) of this section are satisfied on the date of grant of such option, the unexercised portion of the January option remains an incentive stock option regardless of the changes in F’s percentage of stock ownership in R after the date of grant. However, the July option is not an incentive stock option because, on the date that it is granted, F owns 20 percent (25,000 shares owned by F divided by 125,000 shares of R stock issued and outstanding) of the total combined voting power of all classes of R Corporation stock and, thus the pricing requirements of paragraph (f)(1) of this section are not met.
(iii) Assume the same facts as in paragraph (i) of this Example 3 except that the partial exercise of the January incentive stock option on April 1, 2003, is for only 10,000 shares. Under these circumstances, the July option is an incentive stock option, because, on the date of grant of the July option, F does not own more than 10 percent of the total combined voting power (10,000 shares owned by F divided by 110,000 shares of R issued and outstanding) of all classes of R Corporation stock.
§1.422-4 [Removed]
(a) $100,000 per year limitation —(1) General rule . An option that otherwise qualifies as an incentive stock option nevertheless fails to be an incentive stock option to the extent that the $100,000 limitation described in paragraph (a)(2) of this section is exceeded.
(2) $100,000 per year limitation . To the extent that the aggregate fair market value of stock with respect to which an incentive stock option (determined without regard to this section) is exercisable for the first time by any individual during any calendar year (under all plans of the employer corporation and related corporations) exceeds $100,000, such option is treated as a nonstatutory option. See §1.83-7 for rules applicable to nonstatutory options.
(b) Application . To determine whether the limitation described in paragraph (a)(2) of this section has been exceeded, the following rules apply:
(1) An option that does not meet the requirements of §1.422-2 when granted (including an option which, when granted, contains terms providing that it will not be treated as an incentive stock option) is disregarded. See §1.422-2(a)(4).
(2) The fair market value of stock is determined as of the date of grant of the option for such stock.
(3) Except as otherwise provided in paragraph (b)(4) of this section, options are taken into account in the order in which they are granted.
(4) For purposes of this section, an option is considered to be first exercisable during a calendar year if the option will become exercisable at any time during the year assuming that any condition on the optionee’s ability to exercise the option related to the performance of services is satisfied. If the optionee’s ability to exercise the option in the year is subject to an acceleration provision, then the option is considered first exercisable in the calendar year in which the acceleration provision is triggered. After an acceleration provision is triggered, the options subject to such provision are then taken into account in accordance with paragraph (b)(3) of this section for purposes of applying the limitation described in paragraph (a)(2) of this section to all options first exercisable during a calendar year. However, because an acceleration provision is not taken into account prior to its triggering, an incentive stock option that becomes exercisable for the first time during a calendar year by operation of such a provision does not affect the application of the $100,000 limitation with respect to any option (or portion thereof) exercised prior to such acceleration. For purposes of this paragraph (b)(4), an acceleration provision includes, for example, a provision that accelerates the exercisability of an option on a change in ownership or control or a provision that conditions exercisability on the attainment of a performance goal. See paragraph (d), Example 4 of this section.
(5)(i) An option (or portion thereof) is disregarded if, prior to the calendar year during which it would otherwise have become exercisable for the first time, the option (or portion thereof) is modified and thereafter ceases to be an incentive stock option described in §1.422-2, is canceled, or is transferred in violation of §1.421-1(b)(2).
(ii) If an option (or portion thereof) is modified, canceled, or transferred at any other time, such option (or portion thereof) is treated as outstanding according to its original terms until the end of the calendar year during which it would otherwise have become exercisable for the first time.
(6) A disqualifying disposition has no effect on the determination of whether an option exceeds the $100,000 limitation.
(c) Bifurcation — (1) Options . The application of the rules described in paragraph (b) of this section may result in an option being treated, in part, as an incentive stock option and, in part, as a nonstatutory option. See §1.83-7 for the treatment of nonstatutory options.
(2) Stock . A corporation may issue a separate certificate for incentive option stock or designate such stock as incentive stock option stock in the corporation’s transfer records or plan records. In such a case, the issuance of separate certificates or designation in the corporation’s transfer records or plan records is not a modification under §1.424-1(e). In the absence of such an issuance or designation, shares are treated as first purchased under an incentive stock option to the extent of the $100,000 limitation, and the excess shares are treated as purchased under a nonstatutory option. See §1.83-7 for the treatment of nonstatutory options.
(d) Examples . The following examples illustrate the principles of this section. In each of the following examples E is an employee of X Corporation. The examples are as follows:
Example 1 . General rule . Effective January 1, 2004, X Corporation adopts a plan under which incentive stock options may be granted to its employees. On January 1, 2004, and each succeeding January 1 through January 1, 2013, E is granted immediately exercisable options for X Corporation stock with a fair market value of $100,000 determined on the date of grant. The options qualify as incentive stock options (determined without regard to this section). On January 1, 2014, E exercises all of the options. Because the $100,000 limitation has not been exceeded during any calendar year, all of the options are treated as incentive stock options.
Ejemplo 2. Order of grant . X Corporation is a parent corporation of Y Corporation, which is a parent corporation of Z Corporation. Each corporation has adopted its own separate plan, under which an employee of any member of the corporate group may be granted options for stock of any member of the group. On January 1, 2004, X Corporation grants E an incentive stock option (determined without regard to this section) for stock of Y Corporation with a fair market value of $100,000 on the date of grant. On December 31, 2004, Y Corporation grants E an incentive stock option (determined without regard to this section) for stock of Z Corporation with a fair market value of $75,000 as of the date of grant. Both of the options are immediately exercisable. For purposes of this section, options are taken into account in the order in which granted using the fair market value of stock as of the date on the option is granted. During calendar year 2004, the aggregate fair market value of stock with respect to which E’s options are exercisable for the first time exceeds $100,000. Therefore, the option for Y Corporation stock is treated as an incentive stock option, and the option for Z Corporation stock is treated as a nonstatutory option.
Example 3 . Acceleration provision . (i) In 2004, X Corporation grants E three incentive stock options (determined without regard to this section) to acquire stock with an aggregate fair market value of $150,000 on the date of grant. The dates of grant, the fair market value of the stock (as of the applicable date of grant) with respect to which the options are exercisable, and the years in which the options are first exercisable (without regard to acceleration provisions) are as follows:
(ii) In July of 2004, a change in control of X Corporation occurs, and, under the terms of its option plan, all outstanding options become immediately exercisable. Under the rules of this section, Option 1 is treated as an incentive stock option in its entirety; Option 2 exceeds the $100,000 aggregate fair market value limitation for calendar year 2004 by $10,000 (Option 1’s $60,000 + Option 2’s $50,000 = $110,000) and is, therefore, bifurcated into an incentive stock option for stock with a fair market value of $40,000 as of the date of grant and a nonstatutory option for stock with a fair market value of $10,000 as of the date of grant. Option 3 is treated as a nonstatutory option in its entirety.
Example 4 . Exercise of option and acceleration provision . (i) In 2004, X Corporation grants E three incentive stock options (determined without regard to this section) to acquire stock with an aggregate fair market value of $120,000 on the date of grant. The dates of grant, the fair market value of the stock (as of the applicable date of grant) with respect to which the options are exercisable, and the years in which the options are first exercisable (without regard to acceleration provisions) are as follows:
Fair Market Value of Stock
(ii) On June 1, 2005, E exercises Option 3. At the time of exercise of Option 3, the fair market value of X stock (at the time of grant) with respect to which options held by E are first exercisable in 2005 does not exceed $100,000. On September 1, 2005, a change of control of X Corporation occurs, and, under the terms of its option plan, Option 2 becomes immediately exercisable. Under the rules of this section, because E’s exercise of Option 3 occurs before the change of control and the effects of an acceleration provision are not taken into account until it is triggered, Option 3 is treated as an incentive stock option in its entirety. Option 1 is treated as an incentive stock option in its entirety. Option 2 is bifurcated into an incentive stock option for stock with a fair market value of $20,000 on the date of grant and a nonstatutory option for stock with a fair market value of $20,000 on the date of grant because it exceeds the $100,000 limitation for 2003 by $20,000 (Option 1 for $60,000 + Option 3 for $20,000 + Option 2 for $40,000 = $120,000).
(iii) Assume the same facts as in paragraph (ii) of this Example 4 . except that the change of control occurs on May 1, 2005. Because options are taken into account in the order in which they are granted, Option 1 and Option 2 are treated as incentive stock options in their entirety. Because the exercise of Option 3 (on June 1, 2005) takes place after the acceleration provision is triggered, Option 3 is treated as a nonstatutory option in its entirety.
Example 5 . Cancellation of option . (i) In 2004, X Corporation grants E three incentive stock options (determined without regard to this section) to acquire stock with an aggregate fair market value of $140,000 as of the date of grant. The dates of grant, the fair market value of the stock (as of the applicable date of grant) with respect to which the options are exercisable, and the years in which the options are first exercisable (without regard to acceleration provisions) are as follows:
Fair Market Value of Stock
(ii) On December 31, 2004, Option 2 is canceled. Because Option 2 is canceled before the calendar year during which it would have become exercisable for the first time, it is disregarded. As a result, Option 1 and Option 3 are treated as incentive stock options in their entirety.
(iii) Assume the same facts as in paragraph (ii) of this Example 5 . except that Option 2 is canceled on January 1, 2005. Because Option 2 is not canceled prior to the calendar year during which it would have become exercisable for the first time (2005), it is treated as an outstanding option for purposes of determining whether the $100,000 limitation for 2005 has been exceeded. Because options are taken into account in the order in which granted, Option 1 is treated as an incentive stock option in its entirety. Because Option 3 exceeds the $100,000 limitation by $40,000 (Option 1 for $60,000 + Option 2 for $40,000 + Option 3 for $40,000 = $140,000), it is treated as a nonstatutory option in its entirety.
(iv) Assume the same facts as in paragraph (i) of this Example 5 . except that on January 1, 2005, E exercises Option 2 and immediately sells the stock in a disqualifying disposition. A disqualifying disposition has no effect on the determination of whether the underlying option is considered outstanding during the calendar year during which it is first exercisable. Because options are taken into account in the order in which granted, Option 1 is treated as an incentive stock option in its entirety. Because Option 3 exceeds the $100,000 limitation by $40,000 (Option 1 for $60,000 + Option 2 for $40,000 + Option 3 for $40,000 = $140,000), it is treated as a nonstatutory option in its entirety.
Example 6 . Designation of stock . On January 1, 2004, X grants E an immediately exercisable incentive stock option (determined without regard to this section) to acquire X stock with a fair market value of $150,000 on that date. Under the rules of this section, the option is bifurcated and treated as an incentive stock option for X stock with a fair market value of $100,000 and a nonstatutory option for X stock with a fair market value of $50,000. In these circumstances, X may designate the stock that is treated as stock acquired pursuant to the exercise of an incentive stock option by issuing a separate certificate (or certificates) for $100,000 of stock and identifying such certificates as Incentive Stock Option Stock in its transfer records. In the absence of such a designation (or a designation in the corporation’s transfer records or the plan records) shares with a fair market value of $100,000 are deemed purchased first under an incentive stock option, and shares with a fair market value of $50,000 are deemed purchased under a nonstatutory option.
Par. 10. Section 1.422-5 is added to read as follows:
§1.422-5 Permissible provisions .
(a) General rule . An option that otherwise qualifies as an incentive stock option does not fail to be an incentive stock option merely because such option contains one or more of the provisions described in paragraphs (b), (c), and (d) of this section.
(b) Cashless exercise . (1) An option does not fail to be an incentive stock option merely because the optionee may exercise the option with previously acquired stock of the corporation that granted the option or stock of the corporation whose stock is being offered for purchase under the option. For special rules relating to the use of statutory option stock to pay the option price of an incentive stock option, see §1.424-1(c)(3).
(2) All shares acquired through the exercise of an incentive stock option are individually subject to the holding period requirements described in §1.422-1(a) and the disqualifying disposition rules of §1.422-1(b), regardless of whether the option is exercised with previously acquired stock of the corporation that granted the option or stock of the corporation whose stock is being offered for purchase under the option. If an incentive stock option is exercised with such shares, and the exercise results in the basis allocation described in paragraph (b)(3) of this section, the optionee’s disqualifying disposition of any of the stock acquired through such exercise is treated as a disqualifying disposition of the shares with the lowest basis.
(3) If the exercise of an incentive stock option with previously acquired shares is comprised in part of an exchange to which section 1036 (and so much of section 1031 as relates to section 1036) applies, then:
(i) The optionee’s basis in the incentive stock option shares received in the section 1036 exchange is the same as the optionee’s basis in the shares surrendered in the exchange, increased, if applicable, by any amount included in gross income as compensation pursuant to sections 421 through 424 or section 83. Except for purposes of §1.422-1(a), the holding period of the shares is determined under section 1223. For purposes of §1.422-1 and sections 421(b) and 83 and the regulations thereunder, the amount paid for the shares purchased under the option is the fair market value of the shares surrendered on the date of the exchange.
(ii) The optionee’s basis in the incentive stock option shares not received pursuant to the section 1036 exchange is zero. For all purposes, the holding period of such shares begins as of the date that such shares are transferred to the optionee. For purposes of §1.422-1(b) and sections 421(b) and 83 and the regulations thereunder, the amount paid for the shares is considered to be zero.
(c) Additional compensation . An option does not fail to be an incentive stock option merely because the optionee has the right to receive additional compensation, in cash or property, when the option is exercised, provided such additional compensation is includible in income under section 61 or section 83. The amount of such additional compensation may be determined in any manner, including by reference to the fair market value of the stock at the time of exercise or to the option price.
(d) Option subject to a condition . (1) An option does not fail to be an incentive stock option merely because the option is subject to a condition, or grants a right, that is not inconsistent with the requirements of §§1.422-2 and 1.422-4.
(2) An option that includes an alternative right is not an incentive stock option if the requirements of §1.422-2 are effectively avoided by the exercise of the alternative right. For example, an alternative right extending the option term beyond ten years, setting an option price below fair market value, or permitting transferability prevents an option from qualifying as an incentive stock option. If either of two options can be exercised, but not both, each such option is a disqualifying alternative right with respect to the other, even though one or both options would individually satisfy the requirements of §§1.422-2, 1.422-4, and this section.
(3) An alternative right to receive a taxable payment of cash and/or property in exchange for the cancellation or surrender of the option does not disqualify the option as an incentive stock option if the right is exercisable only when the then fair market value of the stock exceeds the exercise price of the option and the option is otherwise exercisable, the right is transferable only when the option is otherwise transferable, and the exercise of the right has economic and tax consequences no more favorable than the exercise of the option followed by an immediate sale of the stock. For this purpose, the exercise of the alternative right does not have the same economic and tax consequences if the payment exceeds the difference between the then fair market value of the stock and the exercise price of the option.
(e) Examples . The principles of this section are illustrated by the following examples:
Example 1 . On June 1, 2004, X Corporation grants an incentive stock option to A, an employee of X Corporation, entitling A to purchase 100 shares of X Corporation common stock at $10 per share. The option provides that A may exercise the option with previously acquired shares of X Corporation common stock. X Corporation has only one class of common stock outstanding. Under the rules of section 83, the shares transferable to A through the exercise of the option are transferable and not subject to a substantial risk of forfeiture. On June 1, 2005, when the fair market value of an X Corporation share is $25, A uses 40 shares of X Corporation common stock, which A had purchased on the open market on June 1, 2002, for $5 per share, to pay the full option price. After exercising the option, A owns 100 shares of incentive stock option stock. Under section 1036 (and so much of section 1031 as relates to section 1036), 40 of the shares have a $200 aggregate carryover basis (the $5 purchase price x 40 shares) and a three-year holding period for purposes of determining capital gain, and 60 of the shares have a zero basis and a holding period beginning on June 1, 2005, for purposes of determining capital gain. All 100 shares have a holding period beginning on June 1, 2005, for purposes of determining whether the holding period requirements of §1.422-1(a) are met.
Ejemplo 2. Assume the same facts as in Example 1 . Assume further that, on September 1, 2005, A sells 75 of the shares that A acquired through exercise of the incentive stock option for $30 per share. Because the holding period requirements were not satisfied, A made a disqualifying disposition of the 75 shares on September 1, 2005. Under the rules of paragraph (b)(2) and (b)(3) of this section, A has sold all 60 of the non-section-1036 shares and 15 of the 40 section-1036 shares. Therefore, under paragraph (b)(3) of this section and section 83(a), the amount of compensation attributable to A’s exercise of the option and subsequent disqualifying disposition of 75 shares is $1,500 (the difference between the fair market value of the stock on the date of transfer, $1,875 (75 shares at $25 per share), and the amount paid for the stock, $375 (60 shares at $0 per share plus 15 shares at $25 per share)). In addition, A must recognize a capital gain of $675, which consists of $375 ($450, the amount realized from the sale of 15 shares, less A’s basis of $75) plus $300 ($1,800, the amount realized from the sale of 60 shares, less A’s basis of $1,500 resulting from the inclusion of that amount in income as compensation). Accordingly, A must include in gross income for the taxable year in which the sale occurs $1,500 as compensation and $675 as capital gain. For its taxable year in which the disqualifying disposition occurs, if otherwise allowable under section 162 and if the requirements of §1.83-6(a) are met, X Corporation is allowed a deduction of $1,500 for the compensation paid to A.
Example 3.Assume the same facts as in Example 2 . except that, instead of selling the 75 shares of incentive stock option stock on September 1, 2005, A uses those shares to exercise a second incentive stock option. The second option was granted to A by X Corporation on January 1, 2005, entitling A to purchase 100 shares of X Corporation common stock at $22.50 per share. As in Example 2 . A has made a disqualifying disposition of the 75 shares of stock pursuant to §1.424-1(c). Under paragraph (b) of this section, A has disposed of all 60 of the non-section-1036 shares and 15 of the 40 section-1036 shares. Therefore, pursuant to paragraph (b)(3) of this section and section 83(a), the amount of compensation attributable to A’s exercise of the first option and subsequent disqualifying disposition of 75 shares is $1,500 (the difference between the fair market value of the stock on the date of transfer, $1,875 (75 shares at $25 per share), and the amount paid for the stock, $375 (60 shares at $0 per share plus 15 shares at $25 per share)). Unlike Example 2 . A does not recognize any capital gain as a result of exercising the second option because, for all purposes other than the determination of whether the exercise is a disposition pursuant to section 424(c), the exercise is considered an exchange to which section 1036 applies. Accordingly, A must include in gross income for the taxable year in which the disqualifying disposition occurs $1,500 as compensation. If the requirements of §83(h) and §1.83-6(a) are satisfied and the deduction is otherwise allowable under section 162, for its taxable year in which the disqualifying disposition occurs, X Corporation is allowed a deduction of $1,500 for the compensation paid to A. After exercising the second option, A owns a total of 125 shares of incentive stock option stock. Under section 1036 (and so much of section 1031 as relates to section 1036), the 100 “new” shares of incentive stock option stock have the following bases and holding periods: 15 shares have a $75 carryover basis and a three-year-and-three-month holding period for purposes of determining capital gain, 60 shares have a $1,500 basis resulting from the inclusion of that amount in income as compensation and a three-month holding period for purposes of determining capital gain, and 25 shares have a zero basis and a holding period beginning on September 1, 2005, for purposes of determining capital gain. All 100 shares have a holding period beginning on September 1, 2005, for purposes of determining whether the holding period requirements of §1.422-1(a) are met.
Example 4 . Assume the same facts as in Example 2 . except that, instead of selling the 75 shares of incentive stock option stock on September 1, 2005, A uses those shares to exercise a nonstatutory option. The nonstatutory option was granted to A by X Corporation on January 1, 2005, entitling A to purchase 100 shares of X Corporation common stock at $22.50 per share. Unlike Example 3 . A has not made a disqualifying disposition of the 75 shares of stock. After exercising the nonstatutory option, A owns a total of 100 shares of incentive stock option stock and 25 shares of nonstatutory stock option stock. Under section 1036 (and so much of section 1031 as relates to section 1036), the 75 new shares of incentive stock option stock have the same basis and holding period as the 75 old shares used to exercise the nonstatutory option. The additional 25 shares of stock received upon exercise of the nonstatutory option are taxed under the rules of section 83(a). Accordingly, A must include in gross income for the taxable year in which the transfer of such shares occurs $750 (25 shares at $30 per share) as compensation. A’s basis in such shares is the same as the amount included in gross income. For its taxable year in which the transfer occurs, X Corporation is allowed a deduction of $750 for the compensation paid to A to the extent the requirements of section 83(h) and §1.83-6(a) are satisfied and the deduction is otherwise allowable under section 162.
Example 5 . Assume the same facts in Example 1 . except that the shares transferred pursuant to the exercise of the incentive stock option are subject to a substantial risk of forfeiture and not transferable (substantially nonvested) for a period of six months after such transfer. Assume further that the shares that A uses to exercise the incentive stock option are similarly restricted. Such shares were transferred to A on January 1, 2005, through A’s exercise of a nonstatutory stock option which was granted to A on January 1, 2004. A paid $5 per share for the stock when its fair market value was $22.50 per share. A did not file a section 83(b) election to include the $700 spread (the difference between the option price and the fair market value of the stock on date of exercise of the nonstatutory option) in gross income as compensation. After exercising the incentive stock option with the 40 substantially-nonvested shares, A owns 100 shares of substantially-nonvested incentive stock option stock. Section 1036 (and so much of section 1031 as relates to section 1036) applies to the 40 shares exchanged in exercise of the incentive stock option. However, pursuant to section 83(g), the stock received in such exchange, because it is incentive stock option stock, is not subject to restrictions and conditions substantially similar to those to which the stock given in such exchange was subject. For purposes of section 83(a) and §1.83-1(b)(1), therefore, A has disposed of the 40 shares of substantially-nonvested stock on June 1, 2005, and must include in gross income as compensation $800 (the difference between the amount realized upon such disposition, $1,000, and the amount paid for the stock, $200). Accordingly, 40 shares of the incentive stock option stock have a $1,000 basis (the $200 original basis plus the $800 included in income as compensation) and 60 shares of the incentive stock option stock have a zero basis. For its taxable year in which the disposition of the substantially-nonvested stock occurs, X Corporation is allowed a deduction of $800 for the compensation paid to A, provided the requirements of section 83(h) and §1.83-6(a) are satisfied and the deduction is otherwise allowable under section 162.
(f) Effective date — (1) In general . These regulations are effective on August 3, 2004.
(2) Reliance and transition period . For statutory options granted on or before June 9, 2003, taxpayers may rely on the 1984 proposed regulations LR-279-81 (49 FR 4504), the 2003 proposed regulations REG-122917-02 (68 FR 34344), or this section until the earlier of January 1, 2006, or the first regularly scheduled stockholders meeting of the granting corporation occurring 6 months after August 3, 2004. For statutory options granted after June 9, 2003, and before the earlier of January 1, 2006, or the first regularly scheduled stockholders meeting of the granting corporation occurring at least 6 months after August 3, 2004, taxpayers may rely on either the REG-122917-02 or this section. Taxpayers may not rely on LR-279-81 or REG-122917-02 after December 31, 2005. Reliance on LR-279-81, REG-122917-02, or this section must be in its entirety, and all statutory options granted during the reliance period must be treated consistently.
§1.423-1 [Amended]
14. Revising paragraph (d).
15. Revising paragraphs (e)(1) and (e)(2).
16. In paragraph (e)(3), first sentence, remove the phrase “Except as otherwise provided in subparagraph (4) of this paragraph” and add “If section 423(c) applies to an option then,”.
17. In paragraph (e)(3), first sentence, remove the language “, and 424(b)(1).”
18. Removing paragraph (e)(4).
19. Redesignating paragraph (e)(5) as paragraph (e)(4).
20. Revising newly designated paragraph (e)(4).
21. Redesignating paragraph (e)(6) as paragraph (e)(5) and removing the second and third sentences.
22. Adding and reserving a new paragraph (e)(6).
23. In list below, for each section indicated in the left column, remove the language in the middle column and add the language in the right column:
§ 1.424-1 Definitions and special rules applicable to statutory options.
(a) Substitutions and assumptions of options —(1) In general . (i) This paragraph (a) provides rules under which an eligible corporation (as defined in paragraph (a)(2) of this section) may, by reason of a corporate transaction (as defined in paragraph (a)(3) of this section), substitute a new statutory option (new option) for an outstanding statutory option (old option) or assume an old option without such substitution or assumption being considered a modification of the old option. For the definition of modification . see paragraph (e) of this section.
(ii) For purposes of §§1.421-1 through 1.424-1, the phrase “substituting or assuming a stock option in a transaction to which section 424 applies,” “substituting or assuming a stock option in a transaction to which §1.424-1(a) applies,” and similar phrases means a substitution of a new option for an old option or an assumption of an old option that meets the requirements of this paragraph (a). For a substitution or assumption to qualify under this paragraph (a), the substitution or assumption must meet all of the requirements described in paragraphs (a)(4) and (a)(5) of this section.
(2) Eligible corporation . For purposes of this paragraph (a), the term eligible corporation means a corporation that is the employer of the optionee or a related corporation of such corporation. For purposes of this paragraph (a), the determination of whether a corporation is the employer of the optionee or a related corporation of such corporation is based upon all of the relevant facts and circumstances existing immediately after the corporate transaction. See §1.421-1(h) for rules concerning the employment relationship.
(3) Corporate transaction . For purposes of this paragraph (a), the term corporate transaction includes—
(i) A corporate merger, consolidation, acquisition of property or stock, separation, reorganization, or liquidation;
(ii) A distribution (excluding an ordinary dividend or a stock split or stock dividend described in §1.424-1(e)(4)(v)) or change in the terms or number of outstanding shares of such corporation; y
(iii) Such other corporate events prescribed by the Commissioner in published guidance.
(4) By reason of . (i) For a change in an option or issuance of a new option to qualify as a substitution or assumption under this paragraph (a), the change must be made by an eligible corporation (as defined in paragraph (a)(2) of this section) and occur by reason of a corporate transaction (as defined in paragraph (a)(3) of this section).
(ii) Generally, a change in an option or issuance of a new option is considered to be by reason of a corporate transaction, unless the relevant facts and circumstances demonstrate that such change or issuance is made for reasons unrelated to such corporate transaction. For example, a change in an option or issuance of a new option will be considered to be made for reasons unrelated to a corporate transaction if there is an unreasonable delay between the corporate transaction and such change in the option or issuance of a new option, or if the corporate transaction serves no substantial corporate business purpose independent of the change in options. Similarly, a change in the number or price of shares purchasable under an option merely to reflect market fluctuations in the price of the stock purchasable under an option is not by reason of a corporate transaction.
(iii) A change in an option or issuance of a new option is by reason of a distribution or change in the terms or number of the outstanding shares of a corporation (as described in paragraph (a)(3)(ii) of this section) only if the option as changed, or the new option issued, is an option on the same stock as under the old option (or if such class of stock is eliminated in the change in capital structure, on other stock of the same corporation).
(5) Other requirements . For a change in an option or issuance of a new option to qualify as a substitution or assumption under this paragraph (a), all of the requirements described in this paragraph (a)(5) must be met.
(i) In the case of an issuance of a new option (or a portion thereof) in exchange for an old option (or portion thereof), the optionee’s rights under the old option (or portion thereof) must be canceled, and the optionee must lose all rights under the old option (or portion thereof). There cannot be a substitution of a new option for an old option within the meaning of this paragraph (a) if the optionee may exercise both the old option and the new option. It is not necessary to have a complete substitution of a new option for the old option. However, any portion of such option which is not substituted or assumed in a transaction to which this paragraph (a) applies is an outstanding option to purchase stock or, to the extent paragraph (e) of this section applies, a modified option.
(ii) The excess of the aggregate fair market value of the shares subject to the new or assumed option immediately after the change in the option or issuance of a new option over the aggregate option price of such shares must not exceed the excess of the aggregate fair market value of all shares subject to the old option (or portion thereof) immediately before the change in the option or issuance of a new option over the aggregate option price of such shares.
(iii) On a share by share comparison, the ratio of the option price to the fair market value of the shares subject to the option immediately after the change in the option or issuance of a new option must not be more favorable to the optionee than the ratio of the option price to the fair market value of the stock subject to the old option (or portion thereof) immediately before the change in the option or issuance of a new option. The number of shares subject to the new or assumed option may be adjusted to compensate for any change in the aggregate spread between the aggregate option price and the aggregate fair market value of the shares subject to the option immediately after the change in the option or issuance of the new option as compared to the aggregate spread between the option price and the aggregate fair market value of the shares subject to the option immediately before the change in the option or issuance of the new option.
(iv) The new or assumed option must contain all terms of the old option, except to the extent such terms are rendered inoperative by reason of the corporate transaction.
(v) The new option or assumed option must not give the optionee additional benefits that the optionee did not have under the old option.
(6) Obligation to substitute or assume not necessary . For a change in the option or issuance of a new option to meet the requirements of this paragraph (a), it is not necessary to show that the corporation changing an option or issuing a new option is under any obligation to do so. In fact, this paragraph (a) may apply even when the option that is being replaced or assumed expressly provides that it will terminate upon the occurrence of certain corporate transactions. However, this paragraph (a) cannot be applied to revive a statutory option which, for reasons not related to the corporate transaction, expires before it can properly be replaced or assumed under this paragraph (a).
(7) Issuance of stock without meeting the requirements of this paragraph (a) . A change in the terms of an option resulting in a modification of such option occurs if an optionee’s new employer (or a related corporation of the new employer) issues its stock (or stock of a related corporation) upon exercise of such option without satisfying all of the requirements described in paragraphs (a)(4) and (5) of this section.
(8) Date of grant . For purposes of applying the rules of this paragraph (a), a substitution or assumption is considered to occur on the date that the optionee would, but for this paragraph (a), be considered to have been granted the option that the eligible corporation is substituting or assuming. A substitution or an assumption that occurs by reason of a corporate transaction may occur before or after the corporate transaction.
(10) Examples . The principles of this paragraph (a) are illustrated by the following examples:
Example 1 . Eligible corporation . X Corporation acquires a new subsidiary, Y Corporation, and transfers some of its employees to Y. Y Corporation wishes to grant to its new employees and to the employees of X Corporation new options for Y shares in exchange for old options for X shares that were previously granted by X Corporation. Because Y Corporation is an employer with respect to its own employees and a related corporation of X Corporation, Y Corporation is an eligible corporation under paragraph (a)(2) of this section with respect to both the employees of X and Y Corporations.
Ejemplo 2. Corporate transaction . (i) On January 1, 2004, Z Corporation grants E, an employee of Z, an option to acquire 100 shares of Z common stock. At the time of grant, the fair market value of Z common stock is $200 per share. E’s option price is $200 per share. On July 1, 2005, when the fair market value of Z common stock is $400, Z declares a stock dividend of preferred stock distributed on common stock that causes the fair market value of Z common stock to decrease to $200 per share. On the same day, Z grants to E a new option to acquire 200 shares of Z common stock in exchange for E’s old option. The new option has an exercise price of $100 per share.
(ii) A stock dividend other than that described in §1.424-1(e)(4)(v) is a corporate transaction under paragraph (a)(3)(ii) of this section. Generally, the issuance of a new option is considered to be by reason of a corporate transaction. None of the facts in this Example 2 indicate that the new option is not issued by reason of the stock dividend. In addition, the new option is issued on the same stock as the old option. Thus, the substitution occurs by reason of the corporate transaction. Assuming the other requirements of this section are met, the issuance of the new option is a substitution that meets the requirements of this paragraph (a) and is not a modification of the option.
(iii) Assume the same facts as in paragraph (i) of this Example 2 . Assume further that on December 1, 2005, Z declares an ordinary cash dividend. On the same day, Z grants E a new option to acquire Z stock in substitution for E’s old option. Under paragraph (a)(3)(ii) of this section, an ordinary cash dividend is not a corporate transaction. Thus, the exchange of the new option for the old option does not meet the requirements of this paragraph (a) and is a modification of the option.
Example 3 . Corporate transaction . On March 15, 2004, A Corporation grants E, an employee of A, an option to acquire 100 shares of A stock at $50 per share, the fair market value of A stock on the date of grant. On May 2, 2005, A Corporation transfers several employees, including E, to B Corporation, a related corporation. B Corporation arranges to purchase some assets from A on the same day as E’s transfer to B. Such purchase is without a substantial business purpose independent of making the exchange of E’s old options for the new options appear to be by reason of a corporate transaction. The following day, B Corporation grants to E, one of its new employees, an option to acquire shares of B stock in exchange for the old option held by E to acquire A stock. Under paragraph (a)(3)(i) of this section, the purchase of assets is a corporate transaction. Generally, the substitution of an option is considered to occur by reason of a corporate transaction. However, in this case, the relevant facts and circumstances demonstrate that the issuance of the new option in exchange for the old option occurred by reason of the change in E’s employer rather than a corporate transaction and that the sale of assets is without a substantial corporate business purpose independent of the change in the options. Thus, the exchange of the new option for the old option is not by reason of a corporate transaction that meets the requirements of this paragraph (a) and is a modification of the old option.
Example 4 . Corporate transaction . (i) E, an employee of Corporation A, holds an option to acquire 100 shares of Corporation A stock. On September 1, 2006, Corporation A has one class of stock outstanding and declares a stock dividend of one share of common stock for each outstanding share of common stock. The rights associated with the common stock issued as a dividend are the same as the rights under existing shares of stock. In connection with the stock dividend, E’s option is exchanged for an option to acquire 200 shares of Corporation A stock. The per-share exercise price is equal to one half of the per-share exercise price of the original option. The stock dividend merely changes the number of shares of Corporation A outstanding and effects no other change to the stock of Corporation A. The option is proportionally adjusted and the aggregate exercise price remains the same and therefore satisfies the requirements described in §1.424-1(e)(4)(v).
(ii) The stock dividend is not a corporate transaction under paragraph (a)(3) of this section, and the declaration of the stock dividend is not a modification of the old option under paragraph (a) of this section. Pursuant to §1.424-1(e)(4)(v), the exercise price of the old option may be adjusted proportionally with the change in the number of outstanding shares of Corporation A such that the ratio of the aggregate exercise price of the option to the number of shares covered by the option is the same both before and after the stock dividend. The adjustment of E’s option is not treated as a modification of the option.
Example 5 . Additional benefit . On June 1, 2004, P Corporation acquires 100 percent of the shares of S Corporation and issues a new option to purchase P shares in exchange for an old option to purchase S shares that is held by E, an employee of S. On the date of the exchange, E’s old option is exercisable for 3 more years, and, after the exchange, E’s new option is exercisable for 5 years. Because the new option is exercisable for an additional period of time beyond the time allowed under the old option, the effect of the exchange of the new option for the old option is to give E an additional benefit that E did not enjoy under the old option. Thus, the requirements of paragraph (a)(5) of this section are not met, and this paragraph (a) does not apply to the exchange of the new option for the old option. Therefore, the exchange is a modification of the old options.
Example 6 . Spread and ratio tests . E is an employee of S Corporation. E holds an old option that was granted to E by S to purchase 60 shares of S at $12 per share. On June 1, 2005, S Corporation is merged into P Corporation, and on such date P issues a new option to purchase P shares in exchange for E’s old option to purchase S shares. Immediately before the exchange, the fair market value of an S share is $32; immediately after the exchange, the fair market value of a P share is $24.The new option entitles E to buy P shares at $9 per share. Because, on a share-by-share comparison, the ratio of the new option price ($9 per share) to the fair market value of a P share immediately after the exchange ($24 per share) is not more favorable to E than the ratio of the old option price ($12 per share) to the fair market value of an S share immediately before the exchange ($32 per share) (9/24 = 12/32), the requirements of paragraph (a)(5)(iii) of this section are met. The number of shares subject to E’s option to purchase P stock is set at 80.Because the excess of the aggregate fair market value over the aggregate option price of the shares subject to E’s new option to purchase P stock, $1,200 (80 x $24 minus 80 x $9), is not greater than the excess of the aggregate fair market value over the aggregate option price of the shares subject to E’s old option to purchase S stock, $1,200 (60 x $32 minus 60 x $12), the requirements of paragraph (a)(5)(ii) of this section are met.
Example 7 . Ratio test and partial substitution . Assume the same facts as in Example 6 . except that the fair market value of an S share immediately before the exchange of the new option for the old option is $8, that the option price is $10 per share, and that the fair market value of a P share immediately after the exchange is $12.P sets the new option price at $15 per share. Because, on a share-by-share comparison, the ratio of the new option price ($15 per share) to the fair market value of a P share immediately after the exchange ($12) is not more favorable to E than the ratio of the old option price ($10 per share) to the fair market value of an S share immediately before the substitution ($8 per share) (15/12 = 10/8), the requirements of paragraph (a)(5)(iii) of this section are met. Assume further that the number of shares subject to E’s P option is set at 20, as compared to 60 shares under E’s old option to buy S stock. Immediately after the exchange, 2 shares of P are worth $24, which is what 3 shares of S were worth immediately before the exchange (2 x $12 = 3 x $8).Thus, to achieve a complete substitution of a new option for E’s old option, E would need to receive a new option to purchase 40 shares of P ( i. e. . 2 shares of P for each 3 shares of S that E could have purchased under the old option (2/3 = 40/60)). Because E’s new option is for only 20 shares of P, P has replaced only 1 / 2 of E’s old option, and the other 1 / 2 is still outstanding.
Example 8 . Partial substitution . X Corporation forms a new corporation, Y Corporation, by a transfer of certain assets and, in a spin-off, distributes the shares of Y Corporation to the stockholders of X Corporation. E, an employee of X Corporation, is thereafter an employee of Y. Y wishes to substitute a new option to purchase some of its stock for E’s old option to purchase 100 shares of X. E’s old option to purchase shares of X, at $50 a share, was granted when the fair market value of an X share was $50, and an X share was worth $100 just before the distribution of the Y shares to X’s stockholders. Immediately after the spin-off, which is also the time of the substitution, each share of X and each share of Y is worth $50.Based on these facts, a new option to purchase 200 shares of Y at an option price of $25 per share could be granted to E in complete substitution of E’s old option. In the alternative, it would also be permissible in connection with a spinoff to grant E a new option to purchase 100 shares of Y, at an option price of $25 per share, and for E to retain an option to purchase 100 shares of X under the old option, with the option price adjusted to $25. However, because X is no longer a related corporation with respect to Y, E must exercise the option for 100 shares of X within three months from the date of the spinoff for the option to be treated as a statutory option. See §1.421-1(h).
Example 9 . Stockholder approval requirements . (i) X Corporation, a publicly traded corporation, adopts an incentive stock option plan that meets the requirements of §1.422-2. Under the plan, options to acquire X stock are granted to X employees. X Corporation is acquired by Y Corporation and becomes a subsidiary corporation of Y Corporation. After the acquisition, X employees remain employees of X. In connection with the acquisition, Y Corporation substitutes new options to acquire Y stock for the old options to acquire X stock previously granted to the employees of X. As a result of this substitution, on exercise of the new options, X employees receive Y Corporation stock.
(ii) Because the requirements of §1.422-2 were met on the date of grant, the substitution of the new Y options for the old X options does not require new stockholder approval. If the other requirements of paragraphs (a)(4) and (5) of this section are met, the issuance of new options for Y stock in exchange for the old options for X stock meets the requirements of this paragraph (a) and is not a modification of the old options.
(iii) Assume the same facts as in paragraphs (i) and (ii) of this Example 9 . Assume further that as part of the acquisition, X amends its plan to allow future grants under the plan to be grants to acquire Y stock. Because the amendment of the plan to allow options on a different stock is considered the adoption of a new plan under §1.422-2(b)(2)(iii), the stockholders of Y must approve the plan within 12 months before or after the date of the amendment of the plan. If the stockholders of Y timely approve the plan, the future grants to acquire Y stock will be incentive stock options (assuming the other requirements of §1.422-2 have been met).
Example 10 . Modification . X Corporation merges into Y Corporation. Y Corporation retains employees of X who hold old options to acquire X Corporation stock. When the former employees of X exercise the old options, Y Corporation issues Y stock to the former employees of X. Under paragraph (a)(7) of this section, because Y issues its stock on exercise of the old options for X stock, there is a change in the terms of the old options for X stock. Thus, the issuance of Y stock on exercise of the old options is a modification of the old options.
Example 11 . Eligible corporation . (i) D Corporation grants an option to acquire 100 shares of D Corporation stock to E, an employee of D Corporation. S Corporation is a subsidiary of D Corporation. On March 1, 2005, D Corporation spins off S Corporation. E remains an employee of D Corporation. In connection with the spin off, D Corporation substitutes a new option to acquire D Corporation stock and a new option to acquire S Corporation stock for the old option in a manner that meets the requirements of paragraph (a) of this section.
(ii) The substitution of the new option to acquire S and D stock for the old option to acquire D stock is not a modification of the old option. However, because S is no longer a related corporation with respect to D Corporation, E must exercise the option for S stock within three months from March 1, 2005, for the option to be treated as a statutory option. See §1.421-1(h).
(iii) Assume the same facts as in paragraph (i) of this Example 11 except that E’s employment with D Corporation is terminated on February 20, 2005. The substitution of the new option to acquire S and D stock for the old option to acquire D stock is not a modification of the old option. However, because the employment relationship between E and D Corporation terminated on February 20, 2005, E must exercise the option for the D and S stock within three months from February 20, 2005, for the option to be treated as a statutory option. See §1.421-1(h).
(iv) A transfer between spouses or incident to divorce (described in section 1041(a)). The special tax treatment of §1.421-2(a) with respect to the transferred stock applies to the transferee. However, see §1.421-1(b)(2) for the treatment of the transfer of a statutory option incident to divorce.
(3) If an optionee exercises an incentive stock option with statutory option stock and the applicable holding period requirements (under §1.422-1(a) or §1.423-1(a)) with respect to such statutory option stock are not met before such transfer, then sections 354, 355, 356, or 1036 (or so much of 1031 as relates to 1036) do not apply to determine whether there is a disposition of those shares. Therefore, there is a disposition of the statutory option stock, and the special tax treatment of § 1.421-2(a) does not apply to such stock.
Example 7 . On January 1, 2004, X Corporation grants to E, an employee of X Corporation, an incentive stock option to purchase 100 shares of X Corporation stock at $100 per share (the fair market value of an X Corporation share on that date). On January 1, 2005, when the fair market value of a share of X Corporation stock is $200, E exercises half of the option, pays X Corporation $5,000 in cash, and is transferred 50 shares of X Corporation stock with an aggregate fair market value of $10,000. E makes no disposition of the shares before January 2, 2006. Under §1.421-2(a), no income is recognized by E on the transfer of shares pursuant to the exercise of the incentive stock option, and X Corporation is not entitled to any deduction at any time with respect to its transfer of the shares to E. E’s basis in the shares is $5,000.
Example 8 . Assume the same facts as in Example 7 . except that on December 1, 2005, one year and 11 months after the grant of the option and 11 months after the transfer of the 50 shares to E, E uses 25 of those shares, with a fair market value of $5,000, to pay for the remaining 50 shares purchasable under the option. On that day, X Corporation transfers 50 of its shares, with an aggregate fair market value of $10,000, to E. Because E disposed of the 25 shares before the expiration of the applicable holding periods, §1.421-2(a) does not apply to the January 1, 2005, transfer of the 25 shares used by E to exercise the remainder of the option. As a result of the disqualifying disposition of the 25 shares, E recognizes compensation income under the rules of §1.421-2(b).
Example 9 . On January 1, 2005, X Corporation grants an incentive stock option to E, an employee of X Corporation. The exercise price of the option is $10 per share. On June 1, 2005, when the fair market value of an X Corporation share is $20, E exercises the option and purchases 5 shares with an aggregate fair market value of $100. On January 1, 2006, when the fair market value of an X Corporation share is $50, X Corporation is acquired by Y Corporation in a section 368(a)(1)(A) reorganization. As part of the acquisition, all X Corporation shares are converted into Y Corporation shares. After the conversion, if an optionee holds a fractional share of Y Corporation stock, Y Corporation will purchase the fractional share for cash equal to its fair market value. After applying the conversion formula to the shares held by E, E has 10 1 / 2 Y Corporation shares. Y Corporation purchases E’s one-half share for $25, the fair market value of one-half of a Y Corporation share on the conversion date. Because E sells the one-half share prior to expiration of the holding periods described in §1.422-1(a), the sale is a disqualifying disposition of the one-half share. Thus, in 2006, E must recognize compensation income of $5 (one-half of the fair market value of an X Corporation share on the date of exercise of the option, or $10, less one-half of the exercise price per share, or $5). For purposes of computing any additional gain, E’s basis in the one-half share increases to $10 (reflecting the $5 included in income as compensation). E recognizes an additional gain of $15 ($25, the fair market value of the one-half share, less $10, the basis in such share). The extent to which the additional $15 of gain is treated as a redemption of Y Corporation stock is determined under section 302.
(d) Attribution of stock ownership . To determine the amount of stock owned by an individual for purposes of applying the percentage limitations relating to certain stockholders described in §§1.422-2(f) and 1.423-2(d), shares of the employer corporation or of a related corporation that are owned (directly or indirectly) by or for the individual’s brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants, are considered to be owned by the individual. Also, for such purposes, if a domestic or foreign corporation, partnership, estate, or trust owns (directly or indirectly) shares of the employer corporation or of a related corporation, the shares are considered to be owned proportionately by or for the stockholders, partners, or beneficiaries of the corporation, partnership, estate, or trust. The extent to which stock held by the optionee as a trustee of a voting trust is considered owned by the optionee is determined under all of the facts and circumstances.
(e) Modification, extension, or renewal of option . (1) This paragraph (e) provides rules for determining whether a share of stock transferred to an individual upon the individual’s exercise of an option after the terms of the option have been changed is transferred pursuant to the exercise of a statutory option.
(2) Any modification, extension, or renewal of the terms of an option to purchase shares is considered the granting of a new option. The new option may or may not be a statutory option. To determine the date of grant of the new option for purposes of section 422 or 423, see §1.421-1(c).
(4)(i) For purposes of §§1.421-1 through 1.424-1 the term modification means any change in the terms of the option (or change in the terms of the plan pursuant to which the option was granted or in the terms of any other agreement governing the arrangement) that gives the optionee additional benefits under the option regardless of whether the optionee in fact benefits from the change in terms. In contrast, for example, a change in the terms of the option shortening the period during which the option is exercisable is not a modification. However, a change providing an extension of the period during which an option may be exercised (such as after termination of employment) or a change providing an alternative to the exercise of the option (such as a stock appreciation right) is a modification regardless of whether the optionee in fact benefits from such extension or alternative right. Similarly, a change providing an additional benefit upon exercise of the option (such as the payment of a cash bonus) or a change providing more favorable terms for payment for the stock purchased under the option (such as the right to tender previously acquired stock) is a modification.
(ii) If an option is not immediately exercisable in full, a change in the terms of the option to accelerate the time at which the option (or any portion thereof) may be exercised is not a modification for purposes of this section. Additionally, no modification occurs if a provision accelerating the time when an option may first be exercised is removed prior to the year in which it would otherwise be triggered. For example, if an acceleration provision is timely removed to avoid exceeding the $100,000 limitation described in §1.422-4, a modification of the option does not occur.
(iii) A change to an option which provides, either by its terms or in substance, that the optionee may receive an additional benefit under the option at the future discretion of the grantor, is a modification at the time that the option is changed to provide such discretion. In addition, the exercise of discretion to provide an additional benefit is a modification of the option. However, it is not a modification for the grantor to exercise discretion specifically reserved under an option with respect to the payment of a cash bonus at the time of exercise, the availability of a loan at exercise, the right to tender previously acquired stock for the stock purchasable under the option, or the payment of employment taxes and/or required withholding taxes resulting from the exercise of a statutory option. An option is not modified merely because an optionee is offered a change in the terms of an option if the change to the option is not made. An offer to change the terms of an option that remains open less than 30 days is not a modification of the option. However, if an offer to change the terms of an option remains outstanding for 30 days or more, there is a modification of the option as of the date the offer to change the option is made.
(iv) A change in the terms of the stock purchasable under the option that increases the value of the stock is a modification of such option, except to the extent that a new option is substituted for such option by reason of the change in the terms of the stock in accordance with paragraph (a) of this section.
(v) If an option is amended solely to increase the number of shares subject to the option, the increase is not considered a modification of the option but is treated as the grant of a new option for the additional shares. Notwithstanding the previous sentence, if the exercise price and number of shares subject to an option are proportionally adjusted to reflect a stock split (including a reverse stock split) or stock dividend, and the only effect of the stock split or stock dividend is to increase (or decrease) on a pro rata basis the number of shares owned by each shareholder of the class of stock subject to the option, then the option is not modified if it is proportionally adjusted to reflect the stock split or stock dividend and the aggregate exercise price of the option is not less than the aggregate exercise price before the stock split or stock dividend.
(vi) Any change in the terms of an option made in an attempt to qualify the option as a statutory option grants additional benefits to the optionee and is, therefore, a modification.
(vii) An extension of an option refers to the granting by the corporation to the optionee of an additional period of time within which to exercise the option beyond the time originally prescribed. A renewal of an option is the granting by the corporation of the same rights or privileges contained in the original option on the same terms and conditions. The rules of this paragraph apply as well to successive modifications, extensions, and renewals.
(viii) Any inadvertent change to the terms of an option (or change in the terms of the plan pursuant to which the option was granted or in the terms of any other agreement governing the arrangement) that is treated as a modification under this paragraph (e) is not considered a modification of the option to the extent the change in the terms of the option is removed by the earlier of the date the option is exercised or the last day of the calendar year during which such change occurred. Thus, for example, if the terms of an option are inadvertently changed on March 1 to extend the exercise period and the change is removed on November 1, then if the option is not exercised prior to November 1, the option is not considered modified under this paragraph (e).
(f) Definitions . The following definitions apply for purposes of §§1.421-1 through 1.424-1:
(1) Parent corporation . The term parent corporation . or parent . means any corporation (other than the employer corporation) in an unbroken chain of corporations ending with the employer corporation if, at the time of the granting of the option, each of the corporations other than the employer corporation owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.
(2) Subsidiary corporation . The term subsidiary corporation . or subsidiary . means any corporation (other than the employer corporation) in an unbroken chain of corporations beginning with the employer corporation if, at the time of the granting of the option, each of the corporations other than the last corporation in an unbroken chain owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.
(g) Effective date — (1) In general . These regulations are effective on August 3, 2004.
(2) Reliance and transition period . For statutory options granted on or before June 9, 2003, taxpayers may rely on the 1984 proposed regulations LR-279-81 (49 FR 4504), the 2003 proposed regulations REG-122917-02 (68 FR 34344), or this section until the earlier of January 1, 2006, or the first regularly scheduled stockholders meeting of the granting corporation occurring 6 months after August 3, 2004. For statutory options granted after June 9, 2003, and before the earlier of January 1, 2006, or the first regularly scheduled stockholders meeting of the granting corporation occurring at least 6 months after August 3, 2004, taxpayers may rely on either the REG-122917-02 or this section. Taxpayers may not rely on LR-279-81 or REG-122917-02 after December 31, 2005. Reliance on LR-279-81, REG-122917-02, or this section must be in its entirety, and all statutory options granted during the reliance period must be treated consistently.
§1.6039-1 and 1.6039-2 [Removed]
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The board of directors is the highest ranking body in a corporation, and the chairman of the board is the highest ranking individual. The CEO generally works under the board and its chairman, and the board generally has the authority to remove the CEO under certain conditions. The CEO, however, cannot remove the board, but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise. It is possible for a person to simultaneously serve as CEO and chairman of the board, though many corporate control experts believe it is bad to vest both offices in the same person.
Partnerships and proprietorships generally have a tax advantage over corporations.
A disadvantage of the corporate form of organization is that corporate stockholders are more exposed to personal liabilities in the event of bankruptcy than are investors in a typical partnership.
4 questions due, need this done 6 hours from now
E16-9 (Issuance of Bonds with Stock Warrants) On May 1, 2014, Friendly Company issued 2,000 $1,000 bonds at 102. Each bond was issued with one detachable stock warrant. Shortly after issuance, the bonds were selling at 98, but the fair value of the warrants cannot be determined.
(a) Prepare the entry to record the issuance of the bonds and warrants. (b) Assume the same facts as part (a), except that the warrants had a fair value of $30. Prepare the entry
to record the issuance of the bonds and warrants.
E16-11 (Issuance, Exercise, and Termination of Stock Options) On January 1, 2015, Titania Inc. granted stock options to officers and key employees for the purchase of 20,000 shares of the company’s $10 par common stock at $25 per share. The options were exercisable within a 5-year period beginning January 1, 2017, by grantees still in the employ of the company, and expiring December 31, 2021. The service period for this award is 2 years. Assume that the fair value option-pricing model determines total compensation expense to be $350,000.
On April 1, 2016, 2,000 options were terminated when the employees resigned from the company. The market price of the common stock was $35 per share on this date.
On March 31, 2017, 12,000 options were exercised when the market price of the common stock was $40 per share.
Prepare journal entries to record issuance of the stock options, termination of the stock options, exercise of the stock options, and charges to compensation expense, for the years ended December 31, 2015, 2016, and 2017
E16-15 (Weighted-Average Number of Shares) Newton Inc. uses a calendar year for financial reporting. The company is authorized to issue 9,000,000 shares of $10 par common stock. At no time has Newton is - sued any potentially dilutive securities. Listed below is a summary of Newton’s common stock activities.
1. Number of common shares issued and outstanding at December 31, 2012 2. Shares issued as a result of a 10% stock dividend on September 30, 2013 3. Shares issued for cash on March 31, 2014
Number of common shares issued and outstanding at December 31, 2014 4. A 2-for-1 stock split of Newton’s common stock took place on March 31, 2015
2,000,000 200,000 2,000,000
(a) Compute the weighted-average number of common shares used in computing earnings per common share for 2013 on the 2014 comparative income statement.
(b) Compute the weighted-average number of common shares used in computing earnings per common share for 2014 on the 2014 comparative income statement.
(c) Compute the weighted-average number of common shares to be used in computing earnings per common share for 2014 on the 2015 comparative income statement.
(d) Compute the weighted-average number of common shares to be used in computing earnings per common share for 2015 on the 2015 comparative income statement.
E16-23 (EPS with Convertible Bonds) On June 1, 2012, Andre Company and Agassi Company merged to form Lancaster Inc. A total of 800,000 shares were issued to complete the merger. The new corporation reports on a calendar-year basis.
On April 1, 2014, the company issued an additional 400,000 shares of stock for cash. All 1,200,000 shares were outstanding on December 31, 2014.
Lancaster Inc. also issued $600,000 of 20-year, 8% convertible bonds at par on July 1, 2014. Each $1,000 bond converts to 40 shares of common at any interest date. None of the bonds have been converted to date. Lancaster Inc. is preparing its annual report for the fiscal year ending December 31, 2014. The annual report will show earnings per share figures based upon a reported after-tax net income of $1,540,000. (Los
Determine the following for 2014.
(a) The number of shares to be used for calculating: (1) Basic earnings per share. (2) Diluted earnings per share.
(b) The earnings figures to be used for calculating: (1) Basic earnings per share. (2) Diluted earnings per share.
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xxxxx xxxxxxxxx xx Bonds with Stock Warrants) On May 1, xxxxx xxxxxxxx xxxxxxx xxxxxx xxxxx $1,000 bonds at 102. Each xxxx xxx issued xxxx xxx detachable stock warrant. Shortly after xxxxxxxxx the bonds xxxx selling xx 98, xxx xxx market xxxxx xx xxx xxxxxxxx xxxxxx be xxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxx the entry to record the xxxxxxxx xx xxx xxxxx xxx xxxxxxxxxxxxx xxxxxx the xxxx xxxxx xx xxxx (a), except xxxx xxx xxxxxxxx xxx x fair xxxxx xx xxxx Prepare xxx xxxxx to xxxxxx xxx issuance xx xxx xxxxx xxx warrants. xxxxxxxxx
(a) Cash xxxxxxxxxxx x 1.02) 2,040,000
xxxxxxxxx xx xxxxx xxxxxxxxxxxxxxx
xxxx – xxxx x $2,000,000]
xxxxxx Payable 2,000,000
xxxxxxxx Capital—xxxxx Warrants 80,000*
*$2,040,000 – xxxxxxxxxxx x xxxx
xxxxxxxxxx value of bonds xxxxxxx warrants $1,960,000
Market xxxxx xx xxxxxxxx (2,000 x xxxxx 60,000
Total xxxxxx value $2,020,000
SINGAPORE - Singapore Exchange (SGX) is discussing with brokers and could have single-stock options in the next 15 to 18 months now that technological constraints have been lifted, SGX president Muthukrishnan Ramaswami said yesterday.
The exchange also hopes to gain US recognition as a clearing house within the next couple of months, which will allow US customers to once again add to their positions in Singapore's iron ore swaps market, Mr Ramaswami said.
SGX recently shifted to a new information technology infrastructure that is expected to streamline operations and lower transaction costs.
"The key thing was to get rid of the back-end mainframe, which was a big constraint, which we've done," he said.
"And now we've got to get a plan out there. And we're working with the brokers on when is the right time and how do you do it."
Mr Ramaswami did not expect the single-stock option market to be an earthshaking business because of the size of the Singapore securities market in general, but he believed it would offer enough opportunities for investors to add some liquidity.
"It creates demand," he said.
"Today the only way you can make money on a stock you're holding is either by selling it or on the dividend. But if you have an option market, you can write a call. Suppose you're sitting on DBS, you think it's going to $15 or if it's at $15 you want to sell, you can write an option. And if it doesn't go to $15 you still make some money. If it goes to $15 you've got the price you wanted."
SGX has also applied and is awaiting recognition from the US Commodities and Futures Trading Commission (CFTC) as a derivatives clearing organisation, said Mr Ramaswami.
The lack of that designation put a damper on SGX's iron ore swaps market - which clears more than 90 per cent of the world's iron ore swaps - in October as new CFTC rules prevented US customers from adding to their positions on non-recognised clearing houses.
Mr Ramaswami - who totes a notebook imprinted with the slogan "Never, never, never, give up" as a personal reminder of the demands of regulatory compliance - said he believes SGX is the first in line in getting approval under the new regime, and hopes for clarity within the next two months.
"We were a recognised clearing house under the old rules, so there's no reason why we shouldn't get it under the new rules," he said.
There were only three or four major US customers active on the iron ore swaps market, so the delay, while significant, is not critical, he added.
"If you look from Oct 12 until now, our volumes have grown. So yes, the US customers are not able to hold new positions with us, but overall volumes have grown, so we can't even go to the CFTC and say, you're killing our business," Mr Ramaswami quipped.
On the front of "futurisation", or regulatory pressure to shift toward more transparent exchange-traded futures contracts from over-the-counter swaps, Mr Ramaswami acknowledged that markets in Asia may not have sufficient liquidity to support a full transition to futures.
But he did not rule out the possibility of having a hybrid system where both futures and swaps can be cleared under a single system, in order to reconcile demands for transparency and liquidity.
"The mechanism is not complex," he added.
Home Depot (HD)
HD » Temas & raquo; 6. EMPLOYEE STOCK PLANS
This excerpt taken from the HD 10-K filed Mar 29, 2007.
6. EMPLOYEE STOCK PLANS
The Home Depot, Inc. 2005 Omnibus Stock Incentive Plan ("2005 Plan") and The Home Depot, Inc. 1997 Omnibus Stock Incentive Plan ("1997 Plan") (collectively the "Plans") provide that incentive, non-qualified stock options, stock appreciation rights, restricted shares, performance shares, performance units and deferred shares may be issued to selected associates, officers and directors of the Company. Under the 2005 Plan, the maximum number of shares of the Company's common stock authorized for issuance is 255 million shares, with any award other than a stock option reducing the number of shares available for issuance by 2.11 shares. As of January 28, 2007, there were 236 million shares available for future grant under the 2005 Plan. No additional equity awards may be issued from the 1997 Plan after the adoption of the 2005 Plan on May 26, 2005.
Under the Plans, as of January 28, 2007, the Company had granted incentive and non-qualified stock options for 184 million shares, net of cancellations (of which 120 million have been exercised). Debajo
the terms of the Plans, incentive stock options and non-qualified stock options are to be priced at or above the fair market value of the Company's stock on the date of the grant. Typically, incentive stock options and non-qualified stock options vest at the rate of 25% per year commencing on the first anniversary date of the grant and expire on the tenth anniversary date of the grant. The Company recognized $148 million, $117 million and $71 million of stock-based compensation expense in fiscal 2006, 2005 and 2004, respectively, related to stock options.
Under the Plans, as of January 28, 2007, the Company had issued 12 million shares of restricted stock, net of cancellations (the restrictions on 2 million shares have lapsed). Generally, the restrictions on the restricted stock lapse according to one of the following schedules: (1) the restrictions on 100% of the restricted stock lapse at 3, 4 or 5 years, (2) the restrictions on 25% of the restricted stock lapse upon the third and sixth year anniversaries of the date of issuance with the remaining 50% of the restricted stock lapsing upon the associate's attainment of age 62, or (3) the restrictions on 25% of the restricted stock lapse upon the third and sixth year anniversaries of the date of issuance with the remaining 50% of the restricted stock lapsing upon the earlier of the associate's attainment of age 60 or the tenth anniversary date. Additionally, certain awards may become non-forfeitable upon the attainment of age 60, provided the associate has had five years of continuous service. The fair value of the restricted stock is expensed over the period during which the restrictions lapse. The Company recorded stock-based compensation expense related to restricted stock of $95 million, $32 million and $22 million in fiscal 2006, 2005 and 2004, respectively.
In fiscal 2006, 2005 and 2004, there were 417,000, 461,000 and 461,000 deferred shares, respectively, granted under the Plans. Each deferred share entitles the associate to one share of common stock to be received up to five years after the vesting date of the deferred share, subject to certain deferral rights of the associate. The Company recorded stock-based compensation expense related to deferred shares of $37 million, $10 million and $14 million in fiscal 2006, 2005 and 2004, respectively.
As of January 28, 2007, there were 2.5 million non-qualified stock options outstanding under non-qualified stock option plans that are not part of the Plans.
The Company maintains two ESPPs (U. S. and non-U. S. plans). The plan for U. S. associates is a tax-qualified plan under Section 423 of the Internal Revenue Code. The non-U. S. plan is not a Section 423 plan. The ESPPs allow associates to purchase up to 152 million shares of common stock, of which 120 million shares have been purchased from inception of the plans. The purchase price of shares under the ESPPs is equal to 85% of the stock's fair market value on the last day of the purchase period. During fiscal 2006, there were 3 million shares purchased under the ESPPs at an average price of $32.06. Under the outstanding ESPPs as of January 28, 2007, employees have contributed $10 million to purchase shares at 85% of the stock's fair market value on the last day (June 30, 2007) of the purchase period. The Company had 32 million shares available for issuance under the ESPPs at January 28, 2007. The Company recognized $17 million, $16 million and $15 million of stock-based compensation in fiscal 2006, 2005 and 2004, respectively, related to the ESPPs.
In total, the Company recorded stock-based compensation expense, including the expense of stock options, ESPPs, restricted stock and deferred stock units, of $297 million, $175 million and $125 million, in fiscal 2006, 2005 and 2004, respectively.
The following table summarizes stock options outstanding at January 28, 2007, January 29, 2006 and January 30, 2005, and changes during the fiscal years ended on these dates (shares in thousands):
The total intrinsic value of stock options exercised during fiscal 2006 was $120 million.
As of January 28, 2007, there were approximately 66 million stock options outstanding with a weighted average remaining life of 5.6 years and an intrinsic value of $248 million. As of January 28, 2007, there were approximately 47 million options exercisable with a weighted average option price of $39.20 and an intrinsic value of $162 million. As of January 28, 2007, there were approximately 63 million shares vested or expected to ultimately vest.
The following table summarizes restricted stock outstanding at January 28, 2007 (shares in thousands):
Number of Shares
Weighted Average Grant Date Fair Value
Outstanding at January 29, 2006
Outstanding at January 28, 2007
"6. EMPLOYEE STOCK PLANS" elsewhere:
Omita la hoja de cálculo. Seguimiento de sus inversiones de forma automática.
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Stock option, convertible securities, diluted EPS
On January 1, 2012, Barwood Corporation granted 5,470 options to executives. Each option entitles the holder to purchase one share of Barwood's $5 par value common stock at $50 per share at any time during the next 5 years. The market price of the stock is $66 per share on the date of grant. The fair value of the options at the grant date is $164,800. The period of benefit is 2 years. Prepare Barwood's journal entries for January 1, 2012, and December 31, 2012 and 2013. (If no entry is required, enter No Entry as the description and 0 as the amount.)
Date Description/Account Debit Credit
1/1/12 12/31/12 12/31/13
Rockland Corporation earned net income of $419,700 in 2012 and had 100,000 shares of common stock outstanding throughout the year. Also outstanding all year was $1,119,200 of 10% bonds, which are convertible into 22,384 shares of common. Rockland's tax rate is 40 percent. Compute Rockland's 2012 diluted earnings per share. (Round answer to 2 decimal places, e. g. 2.13.)
DiCenta Corporation reported net income of $282,000 in 2012 and had 50,000 shares of common stock outstanding throughout the year. Also outstanding all year were 6,910 shares of cumulative preferred stock, each convertible into 2 shares of common. The preferred stock pays an annual dividend of $5 per share. DiCenta' tax rate is 40%. Compute DiCenta' 2012 diluted earnings per share. (Round answer to 2 decimal places, e. g. 5.23.)
Solution Summary
Your tutorial gives instructional notes and the journal entries needed. Click in cells to see computations.
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MSc, University of Virginia
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AMT Credit
A valuable tax benefit for some people who paid AMT.
Here's good news: a portion of your AMT liability — perhaps all — may come back to you in the form of a reduction in the tax you pay on future tax returns, or even a refund that exceeds the tax you pay in a later year, because of the AMT credit. To claim this credit you need to have paid AMT in a previous year, and it has to be the right "flavor" of AMT. Generally this means you need to have paid AMT as a result of exercising an incentive stock option, or because of certain other "timing items" such as an AMT adjustment relating to accelerated depreciation. Any AMT you pay for other reasons, such has having a large number of exemptions or a large itemized deduction for state and local taxes, will not qualify you for the credit.
Working with this AMT credit is a two-step process. First you find out how much credit is available, then you find out how much of the credit you can use.
Find the available credit
The first part of your task is to find out how much of the AMT liability from a prior year is eligible for the credit. This involves calculating the alternative minimum tax under a different set of rules — sort of an alternative AMT. What you're doing here is finding out how much of your alternative minimum tax liability came from timing items . items that allow you to delay reporting income, as opposed to items that actually reduce the amount of income or tax you report. If you're lucky, your entire AMT will be available as a credit in future years. But some people find that only a small portion, or none at all, is available for use as a credit.
Determine how much AMT credit you can use
If you have some AMT credit available from a prior year, you have to determine how much of the credit you can use in the current year. There are now two ways to claim AMT credit. Under the normal rule you may be able to begin claiming the credit the first year after you paid AMT, but the amount you can claim is limited as described below. A different rule provides more generous recovery to some people whose available credit remains unused four or more years after the AMT was paid.
Regular rule for claiming AMT credit
Under the regular rule you can only use the AMT credit in a year when you're not paying alternative minimum tax. The amount of credit you can use is limited to the difference between your regular tax and the tax calculated under the AMT rules.
Example: Suppose you have $8,000 of AMT credit available from 2010. In 2011 your regular tax is $37,000. Your tax calculated under the AMT rules is $32,000. You don't have to pay AMT because your regular tax is higher than the tax calculated under the AMT rules. Better still, you're allowed to claim $5,000 of AMT credit, reducing your regular tax to $32,000.
In this example, you would still have $3,000 of AMT credit you haven't used. That amount will be available in 2012: it's carried over to the next year. Unused AMT credit carries over for an unlimited number of years.
Of course, you can't claim more than the amount of the available credit. In the example, if the AMT credit available from 2010 was $2,700, then you would use the full amount of the credit in 2011. You would reduce your regular tax by $2,700 — not by the full $5,000 difference between regular tax and alternative tax.
Refundable AMT credit
Beginning in 2007, people with old unused AMT credit have another possible way to claim AMT credit. This rule allows you to claim the credit without regard to the limitation described above, but only if you have unused AMT credit from four or more years earlier.
When to claim AMT credit
Many people assume that if the AMT credit arises from exercising an incentive stock option, they can't claim the credit until they sell the shares they acquired by exercising the option. That's not the case. Selling ISO shares may help you claim a larger AMT credit, but you can claim the credit without selling shares. Under the general rule you can claim the credit whenever your regular income tax is larger than the tax figured under the AMT rules.
Example: Suppose you exercised an incentive stock option in 2009, planning to sell the shares when they matured in 2010. You paid $10,000 of AMT on your 2009 tax return, but the share value dropped before you had a chance to sell. You decided to hold on and see if the value of the shares would recover. In 2012 you still hold the shares, and now you're wondering if you can sell the shares to claim the credit.
Chances are that you could have recovered thousands of dollars in AMT credit already, on your tax returns for past years beginning with 2010. You didn't have to sell the shares to claim the credit. You simply had to file Form 8801 with your tax return. Depending on your situation — income level, filing status, number of personal exemptions and so forth — you may find that you were entitled to hundreds or even thousands of dollars of credit each year without selling the shares.
Here's the rule: If you pay AMT because of exercising an incentive stock option, you need to file Form 6251 for the year of exercise. Then every year after that you need to file both Form 6251 and Form 8801 until you've claimed the entire credit.
You didn't file?
If you didn't file Form 8801 with your prior year returns, you need to amend those returns, for two reasons. One is that you could have a nice refund check coming. And the other is that there's no way to claim the credit in a later year without filling out this form for the years intervening between the year you paid AMT and the year you claimed the credit.
That's because the amount of credit available for you to claim depends on what happened in each year. You don't know the amount of your credit carryover to 2012 without filling out this form for 2011. But to fill it out for 2011, you need the numbers from Form 8801 for 2010 — and so on, back to the year you paid AMT.
El tiempo se agota
As a general rule you're allowed to go back and amend tax returns for three years. If you failed to claim AMT credit that was available for your year 2008 tax return, you need to file the amended return by April 15, 2012 (or three years after the actual filing date if you applied for an extension and filed within the extension period).
Why not just forget about those prior years and claim the credit beginning in some later year? The answer is that it doesn't work that way. The amount of credit that carries over from one year to the next depends on the specifics of your tax return for each intervening year, not that amount of credit you actually claim. In other words, use it or lose it!
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January 18, 2006
Date: Sun, 25 Dec 2005 From: Andy
The holding period for ISOs is confusing the way you explain it. (Hold the stock for two years after grant and one year after exercise.) I believe it should state exercise the option two years after grant and sell the stock 1 year after exercise.
Responder
Date: Mon, 09 Jan 2006
I’m sorry you find this confusing. The requirements are spelled out in the Internal Revenue Code.
I think it might help if I give you an example, which shows your suggested explanation is in error.
John was granted an ISO for 100 shares of Supercorp stock on April 1, 2004.
He exercised the option on January 1, 2005.
In order to meet the holding period requirements, John must hold the stock until after April 1, 2006. The stock would be held more than two years after the grant date after April 1, 2006 and more than one year after the exercise date after January 1, 2006. The later date is April 1, 2006.
For more information about incentive stock options, request our free report, Incentive Stock Options – Executive Tax and Financial Planning Strategies .
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Early Disposition of ISO Stock
An explanation of selling ISO stock before the end of the special holding period.
When you exercise a nonqualified option you have to report and pay tax on compensation income. You don't report compensation income when you exercise an incentive stock option — and if you hold the stock long enough, you'll never report compensation income from that stock. Of course, you'll have to report a capital gain if you sell the stock for a profit.
There's a catch. If you don't hold the stock long enough, you've made a disqualifying disposition . You'll have to report some or all of your gain as compensation income, which usually means paying a much higher rate of tax.
Special holding period
To avoid a disqualifying disposition you have to hold the stock you acquired by exercising your ISO beyond the later of the following two dates:
One year after the date you exercised the ISO, or
Two years after the date your employer granted the ISO to you.
Many employers don't permit exercise of an ISO within the first year after the employee receives it. If that's the case you don't have to worry about the holding more than two years after the date your employer granted the option.
If you hold the stock long enough to satisfy this special holding period, then any gain or loss you have on a sale of the stock will be long-term capital gain or loss. You won't be required to report any compensation income from the exercise of your option.
If you fail to satisfy the holding period described above, your sale or other disposition of the stock is considered a disqualifying disposition. In this case you'll have to report compensation income as described below.
Disqualifying dispositions
Everyone understands that a sale of the stock within the special holding period results in a disqualifying disposition. It's important to recognize that many other types of transfers can also result in a disqualifying disposition, for example:
A gift to someone other than your spouse.
Using your shares to exercise another incentive stock option.
Transferring your shares to an irrevocable trust.
Certain events do not give rise to a disposition for purposes of these rules, however:
A transfer that occurs as a result of your death.
An exchange of shares that is part of a tax-free reorganization of the corporation that issued the shares (for example, certain mergers).
A transfer that results from exercise of a conversion privilege (for example, converting preferred stock into common stock).
A pledge or hypothecation (in other words, using the stock as collateral).
A transfer that doesn't change the legal title of the shares (such as a transfer to a broker so the stock will be held in street name).
A transfer of stock into joint tenancy (or a transfer out of joint tenancy, provided it goes back to the employee who exercised the ISO).
A transfer to a spouse (or to a former spouse in connection with a divorce) is a special case. This is not considered a disqualifying disposition. Following such a transfer, the transferee spouse is subject to the same tax treatment as would have applied to the transferor. The transferor spouse should provide records needed to determine when the special holding period will be satisfied, the cost basis of the shares and the value of the shares at the time the option was exercised.
Consequences of a disqualifying disposition
The tax consequences of a disqualifying disposition apply in the year the disposition occurs. You aren't supposed to go back and amend the return for the year you exercised the option, if that was an earlier year.
If your disqualifying disposition is a sale of your shares to an unrelated person without a "replacement purchase" (see below), your tax consequences are as follows:
For a sale below the amount you paid for the shares, you don't report any compensation income. Your loss on this sale is reported as a capital loss.
For a sale above the amount you paid for the shares but no higher than the value of the shares as of the date you exercised the option, report your gain on the sale as compensation income (not capital gain).
If you sell your shares at a price that's higher than the value of the shares as of the date you exercised the option, you report two different items. The bargain element when you exercised the shares (the difference between the value of the shares as of that date and the amount you paid) is reported as compensation income. Any additional gain is reported as capital gain (which may be long-term or short-term depending on how long you held the stock).
If you had a disqualifying disposition from a transaction other than a sale to an unrelated person (such as a gift to someone other than your spouse, or a sale to a related person other than your spouse), or you bought replacement shares within 30 days before or after your sale, it's possible that the rules for that type of transfer don't permit the deduction of losses. If your disqualifying disposition comes from a type of transaction where a deduction for losses is not permitted, the following rules apply:
You have to report the full amount of the bargain element from when you exercised the option as compensation income. That's true even if the value of the stock has gone down since the date you exercised the ISO.
If the transaction requires you to report gain (such as a sale to a related person other than your spouse), any gain that exceeds the amount of compensation income should be reported as capital gain (which may be long-term or short-term depending on how long you held the stock).
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How do I figure the cost basis of stock that has split, giving me more of the same stock, so I can figure my capital gain (or loss) on the sale of the stock?
When the old stock and the new stock are identical the basis of the old shares must be allocated to the old and new shares. Thus, you generally divide the adjusted basis of the old stock by the number of shares of old and new stock. The result is your new basis per share of stock. If the old shares were purchased in separate lots for differing amounts of money, the adjusted basis of the old stock must be allocated between the old and new stock on a lot by lot basis.
How do I figure the cost basis when the stocks I'm selling were purchased at various times and at different prices?
If you can identify which shares of stock you sold, your basis is what you paid for the shares sold (plus sales commissions). If you sell a block of the same kind of stock, you can report all the shares sold at the same time as one sale, writing VARIOUS in the "date acquired" column of Form 1040, Schedule D (PDF). However, what you enter into the "cost or other basis" column is the total of all the acquisition costs of the shares sold.
If you cannot adequately identify the shares you sold and you bought the shares at various times for different prices, the basis of the stock sold is the basis of the shares you acquired first (first-in first-out). Except for certain mutual fund shares, you cannot use the average price per share to figure gain or loss on the sale of stock.
For more information, refer to Publication 550. Investment Income and Expenses .
How do we show on our tax form where dividends are reinvested?
Some corporations allow investors to choose to use their dividends to buy more shares of stock in the corporation instead of receiving the dividends in cash. If you are a member of this type of plan, you must report the fair market value on the dividend payment date of the dividends that are reinvested as income on your tax return. You do not actually show that the dividends were reinvested on your return. Keep good records of the dollar amount of the reinvested dividends, the number of additional shares purchased, and the purchase dates. You will need this information when you sell the shares.
Report the dividends that were reinvested with your other dividends, if any, on Form 1040 (PDF) or Form 1040A (PDF). If your total income from ordinary dividends exceeds a dollar amount set by law, you also must file either Form 1040, Schedule B (PDF) or Form 1040A, Schedule 1 (PDF).
For more information on this and other types of dividend reinvestment plans, refer to Ordinary Dividends in Chapter 1 of Publication 550. Investment Income and Expenses .
How do I compute the basis for stock I sold, when I received the stock over several years through a dividend reinvestment plan?
The basis of the stock you sold is the cost of the shares plus any adjustments, such as sales commissions. If you have not kept detailed records of your dividend reinvestments, you may be able to reconstruct those records with the help of public records from sources such as the media, your broker, or the company that issued the dividends.
If you cannot specifically identify which shares were sold, you must use the first-in first-out rule. This means that you deem that you sold the oldest shares first, then the next oldest, then the next-to-the-next oldest, until you have accounted for the number of shares in the sale. In order to establish the basis of these shares, you need to have kept adequate documentation of all your purchases, including those that were through the dividend reinvestment plan. You may not use an average cost basis. Only mutual fund shares may have an average cost basis.
How do I report participation in a qualified employee stock purchase plan on my tax return?
If you participated in a qualified employee stock purchase plan, you do not include any amount in your gross income as a result of the grant or exercise of your option to purchase stock. When you sell the stock that you purchased by exercising the option, you may have to report compensation and capital gain or capital loss. For additional information on tax treatment and holding period requirements, refer to Publication 525. Taxable and Nontaxable Income .
I purchased stock from my employer under a qualified employee stock purchase plan. Now I have received a Form 1099-B from selling it. How do I report this?
If the special holding period requirements are met, generally treat gain or loss from the sale of the stock as capital gain or loss. However, you may have compensation income if:
The option price of the stock was below the stock's fair market value at the time the option was granted, or
You did not meet the holding period requirement.
The holding period requirements is that you must hold the stock for more than 2 years from the time the option is granted to you and for more than 1 year from when the stock was transferred to you. If you do not meet these holding period requirements, there is a disqualifying disposition of the stock. The compensation income that you should report in the year of the disqualifying disposition is the excess of the fair market value of the stock on the date the stock was transferred to you less the amount paid for the shares.
If the holding period requirements are met, but the option price is below the fair market value of the stock at the time the option was granted, you report the discount as compensation income (wages) when you sell the stock. Generally, this compensation income is the lesser of the excess of the fair market value of the stock on the date of the disposition less the exercise price OR the excess of the fair market value of the stock at the time the option was granted less the exercise price.
If the holding period requirement are met and your gain is more than the amount you report as compensation income, the remainder is a capital gain reported on Form 1040, Schedule D (PDF). If you sell the stock for less than the amount you paid for it, your loss is a capital loss, and you do not have ordinary income.
Should I advise the IRS why amounts reported on Form 1099-B do not agree with my Schedule D for proceeds from short sales of stock not closed by the end of year?
If you are able to defer the reporting of gain or loss until the year the short sale closes, there are certain notations you can make on your Form 1040, Schedule D (PDF) that will allow you to reconcile your Forms 1099-B to your Schedule D and still not recognize the gain or loss from the short sale. You will also need to attach a statement explaining the details of your short sale and that it has not closed as of the end of the year. Include your name as it appears on the return and your social security number.
For more on these rules and exceptions that may apply, refer to Chapter 4 of Publication 550. Investment Income and Expenses .
Do I need to pay taxes on that portion of stock I gained as a result of a split?
No, you generally do not need to pay tax on the additional shares of stock you received due to the stock split. You will need to adjust your per share cost of the stock. Your overall cost basis has not changed, but your per share cost has changed.
You will have to pay taxes if you have gain when you sell the stock. Gain is the amount of the proceeds from the sale, minus sales commissions, that exceeds the adjusted basis of the stock sold.
Employee Stock Purchase Plans
Get information about how your employee stock purchase plan can impact your taxes.
Buying company stock at a discount
Many large companies offer Employee Stock Purchase Plans (ESPP) that let you buy your employer's stock at a discount. These plans are offered as an employment incentive, giving you an opportunity to share in the growth potential of your company's stock (and by implication, work hard to keep the stock price moving ahead).
Usually, you make contributions to a stock purchase fund for a certain period of time through payroll deductions. At designated points in the year, your employer then uses the accumulated money in the fund to purchase stock for you.
In many plans, the price that you pay for the stock is the stock price at the time you started contributing to the fund, or the stock price at the time your employer purchases the shares on your behalf, whichever is lower, with a discount of up to 15 percent. Either way, you get to buy the stock at a price that's lower than the market price. Your discounted price is known as the offer or grant price.
The company keeps the stock in your name until you decide to sell it. At that point you have to begin thinking about taxes.
But what about taxes?
When the company buys the shares for you, you do not owe any taxes. You are exercising your rights under the ESPP. You have bought some stock. Hasta aquí todo bien.
When you sell the stock, the discount that you received when you bought the stock is generally considered additional compensation to you, so you have to pay taxes on it as regular income.
If you hold the stock for less than a year before you sell it, any gains will be considered compensation and taxed as such. If you hold the shares for more than one year, any profit will be taxed at the usually lower capital gains rate.
How much of the stock sale price is compensation and how much is capital gain?
That depends on whether your stock sale is a qualifying disposition or a disqualifying disposition .
Both terms are defined below.
You sold the stock within two years after the offering date or one year or less from the exercise (purchase date). In this case, your employer will report the bargain element as compensation on your Form W-2, so you will have to pay taxes on that amount as ordinary income. The bargain element is the difference between the exercise price and the market price on the exercise date. Any additional profit is considered capital gain (short-term or long-term depending on how long you held the shares) and should be reported on Schedule D.
You sold the stock at least two years after the offering (grant date) and at least one year after the exercise (purchase date). If so, a portion of the profit (the “bargain element”) is considered compensation income (taxed at regular rates) on your Form 1040. Any additional profit is considered long-term capital gain (which is be taxed at lower rates than compensation income) and should be reported on Schedule D, Capital Gains and Losses.
Situation 1: Disqualifying Disposition Resulting in Short-Term Capital Gain
In this situation, you sell your ESPP shares less than one year after purchasing them.
This is a disqualifying disposition (sale) because you sold the stock less than two years after the offering (grant) date and less than a year after the exercise date.
Because this is a disqualifying disposition, your employer should include the bargain element in Box 1 of your 2015 Form W-2 as compensation. The bargain element is calculated this way:
Subtract the actual price paid from the market price at the exercise date
Multiply the result by the number of shares: ($25 - $21.25) x 100 = $375
Even if your employer didn't include the bargain amount in Box 1 of Form W-2, you must report this amount as compensation income on line 7 of your Form 1040.
You must also show the sale of the stock on your 2015 Schedule D, Part I for short-term sales because there was less than one year lapsed between the date you acquired the stock (June 30, 2014) and the date you sold it (January 20, 2015).
The sales price you report on Schedule D is $4,990 and the cost basis is $2,500. Your short-term capital gain is the $2,490 difference ($4,990 - $2,500).
How did we come up with these amounts?
The gross sales proceeds from selling the shares is the market price at the date of the sale ($50) times the number of shares sold (100), or $5,000. You then subtract any commissions paid at the sale ($10 in this example), to arrive at the sales price amount of $4,990 reported on Schedule D. Your broker will show this amount on Form 1099-B that you'll receive at the beginning of the year following the year you sold the stock.
The cost basis is the actual price you paid per share (the discount price) times the number of shares ($21.25 x 100 = $2,125), plus the amount reported as income on line 7 of your form 1040 (the $375 bargain element we calculated above), for a final cost basis of $2,500.
Situation 2: Disqualifying Disposition Resulting in Long-Term Capital Gain
In this situation, you sell your ESPP shares more than one year after purchasing them, but less than two years after the offering date.
This is a disqualifying disposition because you sold the stock less than two years after the offering (grant) date. As in the previous example, your employer should include the bargain element in your wages on your 2015 Form W-2. The bargain element is the same as in the first example ($375). You must report this amount as compensation income on line 7 of your 2015 Form 1040.
You must show the sale of the stock on your 2015 Schedule D. It's considered long-term because more than one year passed from the date acquired (January 2, 2011) to the date of sale (January 20, 2015). That is good, because long-term capital gains are taxed at a rate that is lower than your regular tax rate.
In this example, as in the previous one, the sales price you report on Schedule D is $4,990 and the cost basis is $2,500. The long-term gain is the difference of $2,490. ($4,990 - $2,500).
Situation 3: Qualifying Disposition With Stock Price Increase Between Offering Date and Purchase Date
In this situation, you sell your ESPP shares more than one year after purchasing them, and more than two years after the offering date and the market price actually increased from the offering date to the exercise date.
Offering date: 1/01/10
This, is also a qualifying disposition (sale) because over two years have passed between the offering date and the sale date, and over one year has passed between the date of purchase and the date of sale. And this time, the price per share increased from the offering date to the purchase date.
Again, your employer might not report anything on your 2015 Form W-2 as compensation. But you will still need to report some ordinary income on line 7 of your 2015 Form 1040, as "compensation." You report the lesser of:
The gross sales price of $5,000 minus the $1,275 actual discounted price paid for the shares ($12.75 x 100) minus the $10 sales commission= $3,715, or
The per-share company discount times the number of shares. ($2.25 x 100 shares = $225).
So you must report $225 on line 7 on the Form 1040 as "ESPP Ordinary Income."
You must also report the sale of your stock on Schedule D, Part II as a long-term sale. It's long term because there is over one year between the date acquired (6/30/10) and the date of sale (1/20/2015).
The sales price reported on Schedule D is $4,990 ($5,000 gross proceeds - $10 commission). The cost basis is the actual price paid per share times the number of shares ($12.75 x 100 = $1,275), plus the amount that you're reporting as compensation income on line 7 of your Form 1040 ($225). Therefore, your total cost basis is $1,500, and the long-term capital gain reported on Schedule D is $3,490 ($4,990 - $1,500).
línea de fondo
Your employer is not required to withhold Social Security (FICA) taxes when you exercise the option to purchase the stock. Also, your employer is not required to withhold income tax when you dispose of the stock. But you still owe some income tax on any gain resulting from the sale of the stock.
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Option Strategies: The Best Way To Play Gold Mining Stocks For The Next 2 Years
One of my late father's favorite sayings was "Life is like a pendulum. It swings too far to the left, it swings too far to the right and it is rarely in the middle". I am reminded of my dad's folksy wisdom when I look at the performance of gold mining stocks over the last two years. Despite a nice rise in gold prices over the last 24 months, gold mining stocks are actually down over that time period and have underperformed the actual gold price by some 40% (See Chart).
There are a variety of reasons for this underperformance. The main ones are inflation in mining costs due to higher energy costs and escalating worker demands. Strikes and governments demanding a bigger piece of the pie despite existing contracts have also not been helpful. This presents a dilemma as a lot of gold mining stocks seem cheap from a valuation perspective and have a long way to go to catch up with the price of gold. On the flip side, the factors that have driven margins down could continue to persist. One tailwind could be an increasing price for gold over the next two years due to the massive expansion of central banks' balance sheets around the world.
I want to make a bet that gold mining stocks "revert to the mean" and catch up some to the current and potentially escalating cost of gold. At the same time, I want to limit my downside should the miners continue to face increasing cost inflation. I am going to do this with long term call options on two undervalued gold stocks outlined below.
Barrick Gold Corporation (NYSE:ABX ) produces gold and copper from 27 operating mines in North America, South America, the Australia Pacific region, and Africa.
Valuation . ABX is dirt cheap at under 7x forward earnings and provides a 2.4% yield as well. Analysts also expect revenue to jump more than 15% in FY2013 and have a median price target on the stock of $49 a share.
Option Strategy . The stock looks like it has some sort of technical support here (See Chart) so I am going to buy the Jan 2015 40 calls for around $5. If the stock reaches its current price target or gets back to the $55 level it was traded at just a little over year ago; I will make a substantial profit of 80% to 200% (Using the $49 price target and previous high of $55 as parameters). My downside is limited to my $5.
Goldcorp (NYSE:GG ) develops and mines gold, silver, copper, lead, and zinc from its properties in the United States, Canada and Latin America.
Valuation . GG goes for less than 12x forward earnings, has a five year projected PEG of less than 1 (.95) and pays a dividend of 1.5%. Analysts also expect revenue to jump almost 30% in FY2013 and consensus earnings estimates for both FY2012 and FY2013 have risen over the last three months. The 21 analysts that follow the stock have a median price target of over $57 a share on GG.
Option Strategy . The stock chart looks very similar to the one on ABX (See Chart). I also like the Jan 2015 40 calls on this stock. They go for around $5.50. If the stock reaches its current price target over the next two years, I will get a better than a 200% return on my investment. My downside is limited to my $5.50, so this sets up as a good risk/reward bet with a long time frame.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ABX. GG over the next 72 hours. Escribí este artículo yo mismo, y expresa mis propias opiniones. No estoy recibiendo compensación por ello (que no sea de Buscando Alpha). No tengo ninguna relación comercial con ninguna compañía cuyas acciones se mencionan en este artículo.
From the team at myStockOptions. com and myNQDC. com. this blog has commentaries on equity compensation and NQ deferred comp, tips on the related tax and financial planning, updates about new stuff at our websites, and sometimes the lighter side of the topics we cover. Hacemos nuestro mejor esfuerzo para mantener la escritura animada.
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18 January 2016
The end of January is in sight. Along with snowflakes, personal tax-return documents are in the air—or rather, hopefully either in your safe possession or on their way to you. When you have stock compensation, tax-return documents and the information they contain can be confusing and hard to decipher.
Making Sense Of Form W-2 When Stock Compensation Is Reported
Employees who had income from stock compensation or an employee stock purchase plan in 2015 must understand where that income is reported on Form W-2 so that they can complete their tax returns properly. In the Tax Center at myStockOptions. com, we have a section of FAQs about Form W-2 reporting for stock compensation. Cada uno incluye un diagrama anotado de la Forma W-2 que interpreta claramente este documento a veces críptico.
Restricted Stock, RSUs, Performance Shares
The vesting of restricted stock, the share delivery from restricted stock units (RSUs), and the vesting of performance shares all prompt W-2 reporting of the income received. El tratamiento en el W-2 es esencialmente el mismo para los tres tipos de subvención. Income is included in the following places:
Box 1: Wages, tips, and other compensation
Box 3: Social Security wages (to income ceiling)
Box 5: Medicare wages and tips
Box 16: State wages, tips, etc. (if applicable)
Box 18: Local wages, tips, etc. (if applicable)
To learn which boxes show the taxes withheld, and other reporting details for all three grant types, see the related FAQs. Incluyendo diagramas anotados, en el Centro de Impuestos.
Alert: If you made a Section 83(b) election to be taxed on the value of restricted stock at grant, your W-2 for the year of grant, not vesting, will show the income and withholding.
Si usted ejercitó opciones de acciones no calificadas el año pasado, los ingresos que usted reconoció en el ejercicio serán reportados en su W-2. The income from a nonqualified stock option (NQSO) exercise appears on the W-2 with other income in:
Box 1: Wages, tips, and other compensation
Box 3: Social Security wages (up to the income ceiling)
Box 5: Medicare wages and tips
Box 16: State wages, tips, etc. (if applicable)
Box 18: Local wages, tips, etc. (if applicable)
Box 12 (Code V)
That last item, Code V in Box 12, identifies the NQSO income included in Boxes 1, 3, and 5. For the places where the tax-withholding amount appears, see our FAQ on W-2 reporting for NQSOs. (The W-2 reporting is, by the way, identical for stock appreciation rights. with the exception that Code V is not used.)
With incentive stock options. El valor del spread aparece en el W-2 sólo cuando usted hace lo que técnicamente se llama una disposición descalificante. Es decir, cuando usted vende o regalo la acción antes de haber cumplido los períodos de tenencia requeridos de un año desde el ejercicio y dos años de la concesión. In that case, the income appears on the W-2 as compensation income. A diferencia de los NQSO, su empresa no retiene los impuestos federales sobre los ejercicios de la ISO y no se debe ningún dinero para el Seguro Social y Medicare, incluso con una venta en el mismo día o cualquier disposición descalificadora posterior. Para obtener información detallada sobre los informes W-2 para ISOs en esta situación, consulte nuestras Preguntas frecuentes sobre este tema en el Centro de impuestos.
Employee Stock Purchase Plans (ESPPs)
The W-2 reporting for ESPP income depends on whether your company's ESPP is tax-qualified or not and, if it is tax-qualified, how long you hold the shares. For a nonqualified ESPP, there is withholding on the income you recognize at purchase, and the income and withholding are reported on your W-2 in a way resembling that for nonqualified stock options. Con un ESPP calificado por impuestos, nada aparece en su W-2 hasta que venda las acciones. The details of all three situations are clearly presented, with annotated diagrams, in the section on ESPP W-2s in the Tax Center at myStockOptions. com.
Form 3922 For ESPPs And Form 3921 For ISOs
Form W-2 is not the only important piece of tax paperwork that companies are sending these days. In 2015, did you buy shares in your company's employee stock purchase plan (ESPP)? Did you exercise incentive stock options (ISOs)? If so, you should have by now received from your company either IRS Form 3922 (for ESPPs) or IRS Form 3921 (for ISOs). Companies must issue these forms to employees by the end of January, and they must also file them with the IRS (though the IRS filing need not occur until the end of March if it is electronic).
Alert: In 2016, the amount of the IRS penalty doubled for companies that file information returns late or fail to distribute the employee statements.
For employees, many companies issue the information on their own substitute statements instead of using the actual IRS forms. A substitute statement allows a company to aggregate all purchases or exercises in one form rather than issuing a separate IRS form for each transaction.
While Forms 3922 and 3921 may seem confusing at first glance, they are useful because they can help you gather information you will need to prepare your tax return. As the forms also ensure that the IRS has ample information about your ESPP purchases and ISO exercises, they mean that accurate and timely tax-return reporting is more important than ever.
Annotated Diagrams Of Forms 3922 And 3921
To help companies and participants understand these forms and the related tax rules, myStockOptions. com has an article and FAQ on Form 3922 for ESPPs and an article and FAQ on Form 3921 for ISOs. These include annotated examples of the forms that translate IRS jargon into understandable language. You will find this content in the ESPP and ISO tax sections of both myStockOptions. com and the Knowledge Centers that we license to companies and stock plan service providers.
Each ESPP purchase is reported on a separate Form 3922, which presents the following information:
date of grant (usually the beginning of the offering period)
stock FMV on the date of grant
purchase price per share
price per share had the grant date been the purchase date (for purchases where the purchase price was not fixed or determinable on the grant date)
Fecha de compra
stock FMV on the purchase date
date of transfer of legal title
number of shares for which legal title is transferred
Each ISO exercise is reported on a separate Form 3921, which shows the following details:
grant date
exercise price per share
exercise date
the stock FMV on the exercise date
number of shares exercised
Sell Shares In 2015? The Fun Is Just Beginning
If you sold shares from stock compensation or an ESPP last year, you will need guidance to report the sale proceeds on your tax return. Fortunately, the Tax Center at myStockOptions. com features the section Reporting Company Stock Sales. Cada FAQ en la sección incluye diagramas anotados del Formulario 8949 y el Anexo D, las dos formas cruciales para la presentación de informes sobre la venta de acciones. These FAQs clearly explain how the information on Forms W-2, 3922, and 3921 can help you accurately complete IRS Form 8949 when you prepare your tax return.
Resources For Stock Plan Participants And Companies
All of our tax-season content, including our popular annotated tax forms, is available for corporate licensing. Help your participants make the most of their stock compensation by giving them resources for avoiding expensive mistakes on tax returns.
The excellence of our resources is attested by the many testimonials we have received, so don't just take our word for it. As one of our licensees puts it, employees "find the tax information and annotated tax forms extremely helpful." In the words of another client, "employees understand concepts much better with the straightforward illustrations." Please contact us for licensing details (617-734-1979 or info@mystockoptions. com).
16 September 2015
At myStockOptions. com, we see and hear a lot of media coverage and commentaries involving equity compensation. Indeed, part of our daily routine here is staying plugged into news and trends in stock compensation that may affect our content. In this blog piece, we present some of the interesting stories and snippets that have come our way over the past few months.
In the shareholder-dominated world of publicly traded companies, "pay for performance" continues to be the rallying cry for equity compensation. Apple Insider details a recent payout of shares to Apple's CEO, Tim Cook, after the company met the performance goals attached to his restricted stock units (RSUs). For this slice of Mr. Cook's RSU grant to fully vest, Apple's total shareholder return (TSR) had to rank in the top third of the S&P 500 between 25 Aug. 2013 and 24 Aug. 2015. Apple's TSR performance of 76.76% during that period placed 46th out of 458 companies, putting it in the 90th percentile. If Apple's TSR had been in the middle third, the award would have been reduced to 50%, and the award would have been zero if TSR had ended up in the bottom third. Details of the grant terms occur in Mr. Cook's Form 4 filing .
As reported by The Detroit News . General Motors has made its first option grants since the company emerged from bankruptcy in 2009. At least for senior executives, the GM grants have some interesting performance-based quirks not often found in option grants (see the related 8-K filing and grant agreement form ). Time-based vesting applies to 40% of each grant, with a vesting date of February 15, 2017. The remaining 60% of each grant vests over the following three years in 20% annual installments, provided the company's TSR meets or exceeds the median of a peer group of automotive companies during the period from the grant date through December 31 of the year preceding each vesting date. The awards also include explicit noncompete and nonsolicitation restrictions: for one year after they leave the company, the executives are not allowed to join a competitor or recruit employees away from GM.
Why are performance-based stock options somewhat rare? Our FAQ on them explains.
Google's move to split into an array of businesses (e. g. Nest, Calico, Google X) under a parent company called Alphabet has spawned much media attention. The coverage includes a commentary in Wired that ponders the shift's impact on Google's stock compensation. Although these companies currently trade under the Google stock symbol, the Wired writer believes that each will eventually be able to grant its own subsidiary-specific stock options. The writer predicts that these separate businesses will be spun off into their own publicly traded companies, potentially boosting the upside of the grants.
In a feature on John Mackey, the CEO of Whole Foods, Fortune has drawn attention to an unusual practice involving stock options at the company. Famously, Mr. Mackey leads the company on a salary of just $1 per year, and he forgoes stock options. Whole Foods donates to one of its foundations the options that it otherwise would have granted to him. (myStockOptions. com has in-depth content on donating stock options and company stock to charitable foundations.)
Pre-IPO Companies: Uber, Airbnb, And Twitter
An article in The New York Times notes that the so-called unicorns of the pre-IPO world, i. e. fast-growing startups with valuations of at least $1 billion (such as Uber and Airbnb), are using RSUs to recruit talent from established public companies such as Google. The NYT writer explains the approach:
"To snag employees from large rivals, unicorns have a simple recruiting pitch: They are on a path to success, as illustrated by their rising valuations. Many offer generous equity packages of restricted stock units that can later translate to big paydays for employees if the unicorn goes public or is sold—a lure that neither Google nor any other public tech company can dangle."
Journalists continue to watch the transition from options to RSUs at young technology companies. In a blog commentary. The Wall Street Journal observes that while Twitter employees have felt the decline of the company's stock price, having RSUs instead of options has spared them from worse agony.
Our section Pre-IPO has articles and FAQs on equity compensation at privately held companies.
Keep Up With Equity Comp News
Like keeping an eye on equity comp trends? Follow our cool and fun Twitter page for frequent updates about stock compensation in the news.
01 September 2015
If making taxation complicated were an Olympic sport, France would be a contender. However, complexity is not necessarily bad: the latest statutory twist in the taxation of French qualified restricted stock units (RSUs) eases the tax rules for employees who receive new RSU grants under plans approved after August 7, 2015.
Qualified RSUs in France are made under plans that meet certain statutory requirements. Revised tax rules for qualified RSUs were included in the so-called Macron Law ( loi Macron ), a broad package of tax changes developed in 2014 by the French economy minister (Emmanuel Macron) and passed by the French legislature in August of this year. The new rules apply only to grants of qualified RSUs approved by shareholders after August 7, 2015. Different tax rules apply to earlier grants.
For grants of qualified RSUs approved by shareholders after August 7, 2015, the Macron Law reduces the required minimum vesting and share-holding periods from the aggregate of four years mandated by the prior tax regime to just one year of vesting and one year of holding the shares. Moreover, if the vesting period is two years or longer, the holding period is waived, letting employees sell shares immediately upon delivery at vesting. While the income recognized at vesting continues to be taxed at progressive rates, the amount of tax can be reduced by 50% if the shares are held for between two years and eight years or by 65% if the shares are held for longer than eight years.
The Macron Law also changes the employee social taxes incurred at sale on RSU income received at vesting. For grants after August 7, 2015, just one social tax of 15.5% applies instead of the two separate social taxes mandated under the prior tax regime (8% social tax plus 10% employee social contribution). The Macron changes are beneficial to companies as well: the social tax paid by employers drops from 30% at grant to 20% at share delivery.
For further information about the changes in the taxation of French qualified RSUs, see commentaries from Deloitte and Baker & McKenzie .
To learn the details about the taxes on all types of equity compensation in France, including the tax treatment that applies to qualified RSUs granted before the effective date of the Macron Law, see the Global Tax Guide at myStockOptions. com. Covering almost 40 countries, our Global Tax Guide is regularly reviewed and updated as needed. In addition to revisions for the tax changes in France, other recent revisions include updates for major tax developments in Australia. España. and the United Kingdom .
27 July 2015
When you get a grant of restricted stock (but not restricted stock units ), you can make what is called a Section 83(b) election to be taxed on the value of the shares at grant instead of at vesting, the usual time of taxation. People sometimes make this election if they strongly believe the stock price will be higher at the time of vesting, meaning it makes sense to pay taxes on the lower value at grant. (Obviously, this strategy involves risks .)
To make an 83(b) election, you must file it on paper with your local IRS office within 30 days of your grant and give a copy to your company. You must also submit a copy of the election when you file your income tax return. This process was simple and clear enough when tax reporting was handled entirely on paper. But how can you submit your paper 83(b) election with your e-filed tax return?
There is no consensus on the method for attaching the 83(b) election to a tax return filed electronically, as many tax returns now are. Some accountants use IRS Form 8453. which is for the submission of supporting paper documents. According to the instructions of the form, if you file your tax return with an online provider, you must mail Form 8453 with your election to the specified IRS address within three business days after you have received acknowledgement from your intermediate service provider and/or transmitter that the IRS has accepted the electronically filed tax return.
However, many accountants disagree with that approach and believe Form 8453 should not be used, as Section 83(b) elections are not listed on it. In an alternative election method, you merely attach the election form with your electronically filed tax return. This is called an Election Explanation Record and occurs when no official IRS form exists for the election. Tax software allows you to create an election explanation in an online screen and submit it with your return. If the Practitioner PIN Method is used to sign the tax return, the IRS does not want you to also attach a copy of the election to Form 8453.
Proposed Amendment Will End Tax-Return Submission Of The 83(b) Election
On July 17, 2015, the IRS and the Treasury proposed an amendment to the regulations under IRC Section 83(b). Because the IRS perceived the problem of attaching a paper election to an electronic filing, the proposal seeks to end the requirement to file a copy of a Section 83(b) election with your tax return. This relaxation of the rules is expected to take effect for grants made on or after January 1, 2016. However, the IRS will allow you to rely on the proposed changes for grants and stock transfers on or after January 1, 2015. Under the amendment, the IRS will simply scan and save a copy of your original election instead of requiring a second submission with your tax return. In addition to Section 83(b) elections for restricted stock, this rule change will also apply to 83(b) elections filed for early-exercise stock options .
For further information on the proposed amendment, see the official notice about it in The Federal Register . the journal of the US government. For additional insights, see a blog commentary by Michael Melbinger, a compensation attorney at Winston & Strawn, and a client alert from Morrison Cohen.
22 June 2015
The decision of whether you sell or hold the shares depends on various factors. Some of them are under your control.
Impuestos. Shares can be a source of the proceeds needed to pay taxes at vesting, whether through tax withholding. mandatory share surrender, or net share settlement.
Tax planning. Whether you hold the shares and for how long will affect your capital gains tax at sale. Any holding period after vesting does not affect the amount of income tax due for the value of the shares at vesting.
Your cash needs . upcoming life events . and other financial-planning factors . including diversification. dividends paid on your stock, and alternative investments.
Whether your company is publicly traded or privately held . At public companies, be aware of blackouts when you can't trade or stock ownership/retention guidelines that require you to keep a certain amount of company stock. In a privately held company, you will not be able to sell the shares immediately at vesting because of restrictions that are likely to exist in your grant and/or because of the SEC rules on resales .
Calculations in the Restricted Stock & RSUs Comparison Modeling Tool on myStockOptions. com can help you decide. If you are not comfortable with making these decisions on your own, discuss strategies with a financial advisor. This is particularly useful if you are thinking about holding the stock at vesting and company shares represent at least 10% of your net worth.
Alert: If your company requires formal acceptance of the grant agreement, the delivery of the shares at vesting may be suspended until you accept it.
Whether you sell or hold, you will owe taxes on the value of the shares at vesting, when the shares are delivered into your brokerage account. At least for federal tax purposes, the withholding is required to be at the rate for supplemental wages (usually 25%, though it is 39.6% for aggregate amounts above the level of $1 million during a calendar year). In addition, there will be Social Security tax up to the yearly maximum, along with Medicare (plus any state and/or local taxes on this type of income).
Alert: If this rate is insufficient to cover the tax imposed by your federal and state marginal tax rates, you may need to pay estimated taxes.
As mentioned above, you will need to decide how you will provide the taxes that must be withheld. The choices may include using cash, selling enough shares to cover the taxes (a sell-to-cover), or share withholding (i. e. some of the shares are held back for the taxes). Your company may have a mandatory withholding method, in which case you don't have to make a decision, or it may have a default that it will use if you do not elect your withholding method by the deadline.
Facts And Expertise To Help You Decide
The section Restricted Stock at myStockOptions. com has in-depth articles and FAQs on financial planning with these grants that can help you decide what to do at vesting. Eyes tired? Don't want to read? We don't blame you. myStockOptions. com also has podcasts and videos on restricted stock/RSU topics.
23 July 2014
In our effortlessly cool way, at myStockOptions. com we offer podcasts on many topics in equity compensation. To add to our several audio recordings on the basics of equity comp, we have begun a series of podcast interviews with some of our expert contributing authors on a variety of subjects (click on the titles below to listen right now).
Why Restricted Stock And RSUs Are A Good Deal Compensation expert Richard Friedman explains what makes restricted stock and restricted stock units valuable forms of equity compensation. This audio recording is a companion to Mr. Friedman's article on this topic in the Restricted Stock section of myStockOptions. com, where he also has articles on financial and tax planning for restricted stock and RSUs.
Your Company Stock: The Importance Of Diversification In a lively interview, CFP Laura Tanner shares her wisdom on investment diversification for employees with holdings of company stock. This audio recording is a companion to Ms. Tanner's article on diversification at myStockOptions. com.
Financial Planning For Stock Compensation CFP Alan Ungar gives guidance on choosing the optimal time to exercise stock options and expresses his point of view on what employees should do with shares acquired from restricted stock/RSU vesting. This audio recording is a companion to Mr. Ungar's article series on option exercise strategies at myStockOptions. com.
College Funding With Stock Compensation In this interview, college-funding advisor Troy Onink explains strategies for the use of stock options, restricted stock/RSUs, and other equity awards to pay for the ever-increasing costs of higher education. This audio recording is a companion to Mr. Onink's article series in the College Funding section at myStockOptions. com.
This quartet of podcasts is just the start of a long-running series of author interviews that we plan to publish in the coming months and years. In general, we are continuing to expand our multimedia offerings, which include videos on restricted stock and RSUs.
Interested in using our podcasts or other educational materials at your company? Read about ways to license our independent and unbiased content, and please contact us when you are ready to make inquiries.
07 July 2014
Stock plan professionals are always seeking new ways to sugar-coat the pill of stock plan education for busy, work/life-juggling employees. As those of a literary bent know, the written word remains the best (if not most exciting) way to communicate large amounts of complex and detailed information. Conversely, however, written materials on stock compensation serve no purpose if they remain untouched by work-swamped participants who don't have the time or motivation to read them. While a five-minute video cannot express as much information as a 1,500-word article, it has a significant practical advantage over its written counterpart if employees actually watch it, have fun with it, learn from it, and therefore come to appreciate the value of their equity comp.
This reality partly explains the current surge of interest in the use of video for stock plan education and communications. Although most of our content is (engagingly) written, we at myStockOptions. com have been keen observers of the video trend for some time. Our first foray into video was our popular animated presentation on tax-return forms and tax reporting (hey, if there's a way to make learning about tax forms fun, we'll try it). Now we have taken our on-screen careers to the next level with a pair of lively, professionally produced video presentations on everybody's favorite subject these days: restricted stock and RSUs. They are hosted by none other than our editor-in-chief himself, Bruce Brumberg.
In Restricted Stock & RSUs (Part 1): Key Aspects To Know . Bruce presents the fundamentals of restricted stock and RSUs to help stock plan participants make the most of these grants. The coverage includes key concepts, such as vesting schedules and understanding a grant's value.
In Restricted Stock & RSUs (Part 2): Taxes And Related Key Decisions . Bruce explains the basic tax treatment of restricted stock and RSUs, including the tax rates, the timing of taxation, and withholding.
At myStockOptions. com, these videos appear in the sections Restricted Stock: Basics and Restricted Stock: Taxes. By enticing viewers into the subject of their equity comp, the videos provide a helpful gateway to our more detailed content on the related topics.
We welcome your comments on the videos, which in time will be joined by others on ESPPs and stock options. As with much of our content, our videos can be licensed and customized by your company.
26 June 2014
After many years of catching up on stock options, restricted stock and restricted stock units (RSUs) are now the most commonly used types of equity award. In its 2013 Domestic Stock Plan Design Survey . the National Association of Stock Plan Professionals (NASPP) found that "time-based restricted stock grants/awards and performance awards have both surpassed stock options in prevalence," in the words of the survey's executive summary. "Restricted stock/units are now the most commonly used award among companies regardless of industry and at all employee levels (81% of companies). Restricted stock units are the most common form of full value share awards (77%)."
For its 2014 Equity Trends Report . the compensation research firm Equilar looked at trends in the stock-based compensation footnotes of proxy statements to examine stock grant practices at 1,345 companies in the S&P 1500 from 2009 through 2013. Like the NASPP, Equilar observed a striking acceleration in the ongoing shift from stock options toward restricted stock, RSUs, and performance shares:
In 2013, 34.7% of the surveyed companies granted only restricted stock/RSUs, up from just 20% in 2009.
The percentage of companies granting only stock options fell from 10.7% in 2009 to 4.3% in 2013.
Restricted stock only
Other findings by Equilar include the following:
The use of performance share grants continues to grow: 68.9% of the surveyed companies granted performance awards in 2013.
In 2013, 79.7% of all performance share grants were long-term performance awards. In both long-term and short-term plans, the most common performance-related vehicle was performance share units (61.8% of all performance-related grants).
In 2013, 23.7% of all performance-based grants included time-based vesting restrictions after the performance periods. The most common post-performance period was two years of additional vesting.
For additional data on changing stock grant practices, see the related FAQ at myStockOptions. com. See also our article series on trends in corporate stock grant practices as reflected by the data in the NASPP's 2013 Domestic Stock Plan Design Survey .
24 March 2014
The 2014 tax-return season has more potential than ever for confusion, uncertainty, and expensive mistakes. Anybody who sold stock during 2013 must be sure to understand all the related IRS forms. On tax returns involving restricted stock and restricted stock units, many potential errors involve the reporting of sold shares on IRS Form 8949 and Schedule D of IRS Form 1040. Below are some basic mistakes to avoid.
1. After selling any or all of the shares at vesting . you still need to report this sale on IRS Form 8949 and Schedule D even though you are also including it as part of your compensation income on Line 7 of IRS Form 1040. You may even have some small gains or losses, depending on how your company calculates the stock value at vesting and any commissions and fees for the stock sale. (For an annotated example of how to report the restricted stock sale on these forms, see an FAQ on myStockOptions. com.)
If the IRS were to receive a report of your gross sale proceeds from your broker (on Form 1099-B) but without a corresponding report of the sale on your Form 8949, the IRS would think you had failed to report the gain on the sale. Assuming a tax basis of $0, the IRS computers would then automatically send you a notice about the taxes.
2. Even though you never purchased the stock . your tax basis for reporting the stock sale in column (e) on Form 8949 is the amount of compensation income at vesting that appeared on your W-2 (you already reported it on your tax return). If you made a Section 83(b) election (not available for RSUs ), the basis amount is the value at grant on your W-2. Do not assume that, because you did not pay any money to purchase the stock or exercise anything, your tax basis is zero. The cost basis on Box 3 of your 1099-B is blank only because brokers are not required to report the cost basis for noncovered securities. such as restricted stock and RSUs. Otherwise, you will pay double tax on the value of the shares at vesting. See a related FAQ with annotated diagrams of Form 8949 and Schedule D that show how you report stock sales after you have held the stock at vesting.
3. Another way to mistakenly double-report income can occur if you do not realize that your W-2 income in Box 1 already includes stock compensation income. You may wrongly think it was left out, so you erroneously report the income on your Form 1040 in the line for "Other income" (Line 21 on the 2013 form and not Line 7, mentioned above). If you do this, you will be taxing the stock grant income twice as ordinary income. You use Line 21 only when your company mistakenly omits the income at vesting from your W-2 or 1099-MISC.
4. Dividends you receive on restricted stock can raise a few tax-reporting issues during vesting and after the shares vest, as detailed in a related FAQ. In short, the dividends paid will be compensation during vesting (unless you made a Section 83(b) election, which makes the dividends eligible for the lower tax rate on qualified dividends). Be careful not to duplicate dividend income that is part of your W-2 in the total received dividends on your Form 1040.
To read four other crucial tips on tax-return reporting involving restricted stock and RSUs, see the full FAQ about this topic on myStockOptions. com. Also, see other FAQs for the biggest tax-return blunders to avoid with stock options. employee stock purchase plans. or stock appreciation rights .
22 October 2013
When a high-profile company prepares for an initial public offering (IPO), its SEC filings provide an opportunity to analyze the company's stock compensation practices. The IPO of Twitter — about as high-profile as you can get—is expected to occur by mid-November. Twitter's Form S-1 (Amendment No. 1. filed on Oct. 15, 2013) discloses its extensive use of restricted stock units over stock options (see the table on page 88). Apart from awarding stock options to its senior executives (see page 128) and using options in relation to acquisitions (see pages 136–138), Twitter seems to exclusively grant RSUs.
RSU Grants At Twitter
Under Twitter's 2007 equity incentive plan. RSUs granted to domestic employees before Feb. 2013, and all RSUs granted to international employees (the pre-2013 RSUs), vest upon the satisfaction of both a time-based service condition (mainly four years) and what Twitter considers a "performance condition," which is actually more like a vesting condition based on a liquidity event for the company. The performance condition is satisfied on the earlier of either (1) the date that is ( a ) six months after the effective date of this offering or ( b ) Mar. 8 of the calendar year after the effective date of the offering (which the company may elect to accelerate to Feb. 15), whichever comes first; and (2) the date of a change in control. (Details about the company's prior RSU grants appear in a letter Twitter submitted to the SEC in September 2011 to request a Section 12(g) exemption from registering its RSU plan under the Securities Act of 1934.)
While the vesting of these RSUs will cause dilution (see page 47), the amount of dilution will be is much less than it would have been with stock options. (Grants of options have to be much larger to deliver the same compensation grant-date value as RSUs.) The vesting of the post-2013 RSUs is not subject to a performance condition. Instead, the grants have just the standard time-based vesting over a period of four years (see page 86). For future grants after the IPO, Twitter is adopting a stock plan for 2013 that will be effective on the business day immediately before the effective date of the registration statement; it will then no longer make grants under its 2007 plan (see pages 130–132). Twitter is also planning to roll out an ESPP with appealing features (see pages 133–134).
Earnings Charge For Stock Grants
As of Sept. 30, 2013, no stock-based compensation expense had been recognized for the pre-2013 RSUs because a qualifying event meeting the performance condition was not probable (i. e. the grants had not fully vested). In the quarter during which the offering is completed, Twitter will begin recording a stock-based compensation expense based on the grant-date fair value of the pre-2013 RSUs. If this offering had been completed on September 30, 2013, the company would have recorded $385.2 million of cumulative stock-based compensation expense related to the pre-2013 RSUs on that date; and an additional $199.6 million of unrecognized stock-based compensation expense related to the pre-2013 RSUs would have been recognized over a weighted-average period of about three years. In addition to the stock-based compensation expense associated with the pre-2013 RSUs, as of Sept. 30, 2013, the company had an unrecognized stock-based compensation expense of approximately $698.3 million related to other outstanding equity awards (see pages 24 and 86–87).
See myStockOptions. com for additional information on restricted stock units. pre-IPO stock grants, and the rules on the timing of employee stock sales after the IPO.
11 July 2013
Well into July, there has been no summer slowdown in the worlds of equity compensation and nonqualified deferred comp. The tax-rate increases that took effect at the start of 2013 have kept us busy with adding and updating content on financial and tax planning at myStockOptions. com. In-depth analyses of the new tax landscape occur in two articles by experts:
New Tax Act And Medicare Surtax: Impact On Stock Option And Restricted Stock Strategies. by Alan B. Ungar. The American Taxpayer Relief Act and the Affordable Care Act introduced tax-rate increases you need to consider in deciding when to exercise stock options, when to sell company stock, and how to plan around income from restricted stock vesting. This article explains the changes in tax law and suggests strategies for minimizing the new taxes.
Tax Planning For Options, Restricted Stock, And ESPPs After 2013 Tax Law Changes: High-Income Taxpayers Impacted Most (Parts 1 and 2), by Tom Davison and William Whitaker. The beginning of 2013 brought notable shifts in tax rates for people at higher income levels. Part 1 surveys the important tax changes and considers their impact on planning. Part 2 looks at planning strategies involving capital gains rates, the AMT, and ISOs, and considers general ideas related to income-shifting.
For a quicker read with highlights of the new tax provisions and the related planning ideas, see our series of FAQs on the tax-rate increases:
More insights and analysis on the new tax landscape will appear as 2013 progresses.
Articles Dissect The Impact Of 2013 Tax Changes On NQDC
Over at our sister website myNQDC. com. our comprehensive resource about nonqualified deferred compensation (NQDC), four articles examine the impact of the recent tax changes on planning for NQDC:
When Higher Tax Rates Make Nonqualified Plans More Attractive . by William L. MacDonald. This article considers whether the 2013 tax changes have increased the appeal of NQDC plans, looks in number-crunching detail at the pros and cons of a lump-sum payout versus installment distributions, and warns about tax problems that can arise from certain features of NQDC plan design.
Four Nonqualified Plan Trends To Watch With Tax Rate Increases . by Michael Nolan. After explaining why the timing for NQDC plans could not be better, the author pinpoints trends involving income deferral that are likely to gather pace in the new tax and financial-planning environment.
¡NUEVO! Tax Increases That Affect Your Planning For Nonqualified Deferred Compensation . by Bruce Brumberg. The capacity for tax-planning and income-shifting is one of the main benefits that make nonqualified plans appealing. When tax rates increase, the advantages of NQDC plans also grow. In this article, the author explains the various tax changes that affect NQDC planning.
UPDATED! Advantages To Pre-Tax Deferral Of Income In An Uncertain Tax Environment . by Steve Broadbent and Chris Nyland. Learn how to consider recent and future tax-rate changes and investment returns when analyzing whether to participate in your company's NQDC plan. The authors' analysis compares deferred compensation to the after-tax investment of the same money. When tax rates rise, NQDC can perform better over the long term than a comparable personal investment account.
See also the full range of content on tax topics at myNQDC. com.
Other findings by Equilar include the following:
The percentage of the S&P 1500 that granted options during the period of study fell from 78.5% in 2007 to 65.2% in 2012.
During the studied period, there was a sharp increase in the use of restricted stock (including RSUs). In 2007, 80.1% of the companies were granting restricted stock, and by 2012 this figure had risen to 92.8%. Over the six-year period, the median number of shares granted in these types of awards increased at an annual rate of 11.9%.
Among 477 companies that had filed their proxy statements by March 18, 2012, over half (61.8%) revealed that they had used some type of performance-based incentive in equity awards to CEOs during 2012.
For additional data on changing stock grant practices, see a related FAQ on myStockOptions. com.
Equilar's Executive Compensation Summit Reveals Strong Interest In Performance-Based Stock Comp
Last week, we attended Equilar's informative Executive Compensation Summit in Boston. The speakers' presentations and examples provided ample evidence of the ongoing growth in performance-share-type grants to executives, a trend that led us to create a section on myStockOptions. com exclusively about performance-based awards a few years ago. What was clear at the conference was the strong interest many companies have in using relative total shareholder return (TSR) as a metric.
The big issues with these plans seem to be (1) determining the appropriate peer group of companies for the purposes of comparison, and (2) communicating the plans to executives, shareholders, the media, and proxy advisory firms. It is worth noting that the plans which pay out a multiple of the target number of shares when a goal is exceeded also offer some of the upside leverage of stock options without much of the downside. For example, relative TRS grants with a sliding scale for payout awards could result in 200% of the target award amount, regardless of how the stock price performs in absolute terms (some companies do cap payouts when they have a negative absolute TSR).
15 November 2012
Trends in the use of stock options and restricted stock/RSUs for directors on corporate boards is a topic on which equity compensation surveys are often silent. This is why we were pleasantly surprised to find no fewer than three recent surveys that include details on stock comp for directors. The trends they reveal will undoubtedly be of interest to many compensation and stock plan professionals.
Towers Watson . a compensation consulting firm, published data on equity awards to directors in its newsletter Executive Compensation Bulletin . The firm reports that while most Fortune 500 companies tend to pay an equal mix of cash and equity to directors, recent increases in pay have come from the stock side. The firm views this as a way to further strengthen the alignment of interests between shareholders and directors.
At the median, the mix of pay for directors was 45% cash and 55% equity in 2011. These figures were 48% cash and 52% equity back in 2009, and Towers Watson attributes the shift to some companies that have increased grant values. The firm states that equity awards to directors are now almost entirely restricted stock grants, and the number of Fortune 500 companies using stock options has dwindled to a "select group." The value of equity awards to directors has not been affected by volatility in stock prices because most companies base grant guidelines for directors on a fixed value rather than on a fixed number of shares. The median value of annual equity awards for directors rose 9% between 2010 and 2011, to about $125,000.
The most common type of grant made to directors is restricted stock or deferred shares (79%), followed distantly by a combination of stock options/restricted stock (11%) and by grants of just stock options (3%). Stock ownership guidelines and share retention policies appear at 87% of the companies (up from 83% in 2010). The median value of the stock ownership required is $300,000.
In an analysis of director compensation in 2011 at S&P 500 companies, the HR consulting firm Mercer found the following:
Most of the companies (77%) grant only restricted stock to directors.
The percentage of companies granting options or SARs to directors fell from 26% in 2010 to 22% in 2011.
Stock options are awarded alongside restricted stock at 18% of the companies, where typically each grant type makes up about half the total value of a director's equity compensation.
The majority (62%) of the companies award at least one grant type on a fixed-value basis, meaning the dollar value of grants remains the same each year, with a variable number of shares or options accordingly.
At 23% of the companies, new board members get both a yearly grant plus a separate initial equity award upon the election to the board of directors.
Annual cash retainers for directors increased in 2011, to a median value of $75,000, while stock compensation rose 10%, to a median value of $131,900.
In its 2012 Director Compensation Report . the consulting firm Frederic W. Cook & Co. found some similar trends in its research, which covered 240 public companies in the financial services, industrial, retail, and technology sectors, divided into three size categories based on market capitalization. Among the firm's key findings:
Full-value stock awards (restricted stock and RSUs) are the "most prevalent" form of stock grant, using a fixed-dollar value for the grant size. This is a continued shift away from options and fixed-share grant sizes.
The number of companies using stock options has declined about 25% since the prior study. Stock options are used by less than 15% of the financial services, industrial, and retail companies, by contrast with 34% of the tech companies.
The average pay mix varies among sectors and company sizes. For example, stock awards make up 49% and stock options 17% of the total compensation at tech companies (the remaining percentage is cash), while at financial service firms the corresponding percentages are 41% and 3%.
Large-cap companies grant more equity compensation (56% stock and 8% options) than small-cap companies (38% and 7%). The firm explains that large companies are under more pressure to align pay with shareholder interests.
In the industrial and retail sectors, 85% of the companies use stock grants only, while 17% of the tech companies and 5% of the retail companies provide only stock options. At tech companies, 17% use a combination of stock grants and options, while only 7%–12% of the companies in the other sectors use this approach.
At myStockOptions. com. we continually watch for new surveys on equity compensation, as we know how valuable these are to the stock plan professionals who routinely use our website. More recent survey data on stock comp is available in one of our most popular FAQs .
29 October 2012
Earlier this year (see 23 April and 25 May ), as Facebook was in the process of going public, we looked at Facebook's S-1 registration statement, the taxes for employees and the company stemming from its IPO, and the potential issues for employees. Most of the company's pre-IPO stock compensation, which became almost all restricted stock units (RSUs) in 2007, vest after two conditions: a specified length of employment at the company plus a specified length of time after a liquidity event such as an IPO. In its prospectus, Facebook disclosed that vesting and employee share delivery would occur between 151 to 180 days after May 17, 2012, as the company can do this 30 days before or after the date when the liquidity condition is satisfied.
The company moved the vesting date forward to October 25 for current employees, who hold 220 million RSUs, and the net amount of shares are eligible to be sold starting today, October 29 (see the 8-K filed on September 4). The company waived the market-standoff provisions that had prohibited employees from selling or otherwise transferring any of their common stock or securities convertible into or exchangeable for shares of common stock until November 14, 2012. For its former employees and nonemployee directors, who hold 51 million RSUs, the vesting and settlement date is still November 14, 2012 (see page 9 of the 10-Q referencing this).
The end of the lockup became a major news story that attracted coverage by television news media (see video from ABC station KGO-TV in San Francisco), along with scrutiny by various news outlets (e. g. an article at CNN Money ) and blogs (see posts at All Things D and Policy Mic ). They all wonder what Facebook employees will do with their stock, which has a total value of over $5 billion.
Almost all the news reports also noted that employees will owe taxes on the income from these pre-IPO RSUs at ordinary income rates. For many, this will equal 45% of the value of their shares. Commentators also discuss Facebook's intention to net-settle the shares at vesting, instead of leaving employees to sell shares for the withholding taxes they owe. According to CNBC. Facebook explained during its earnings call that it would withhold 120 million shares from the vested RSUs to cover roughly $2.4 billion in taxes. Facebook will use its own cash and credit lines to pay the estimated tax bill, according to the article at CNN Money.
The big question many of the journalists and bloggers try to answer is whether many employees will sell their stock. We also wonder whether Facebook will consider granting stock options. Given the company's lowered stock price, stock options would offer attractive value for current employees, would help with corporate recruiting, and would send a message to the market about its growth potential.
14 August 2012
Earlier this year, we blogged about the potential stock comp wealth (and related tax issues ) that seemed certain to blossom for Facebook employees amid the company's much-hyped initial public offering in May. Time and the market have popped these balloons of expectation. Although investors were predicted to "like" Facebook stock in huge numbers, skepticism about the company's valuation and prospects has prompted significant investor flight over the past few weeks. The surprising plunge in the stock price has created unexpected difficulties for the company's equity compensation.
Angst among Facebook employees about their equity awards has been widely reported (e. g. by Reuters and Business Insider ). While the expiration date of the lockup on most employee shares (almost 50% of total shares outstanding) is still fairly far off (Nov. 14), Reuters notes that some employees are already adjusting their expectations because of the poor post-IPO performance. Many now plan to sell a smaller portion of their stake in the company than they otherwise would have if the stock price had risen or even just stayed flat. "I will definitely take some," said an employee anonymously quoted in the news report. "But my debate is how much." The article in Business Insider wonders whether Facebook may develop problems with employee retention, at least in the short term.
Additionally, Facebook needs to raise cash for the taxes ($2.5–4 billion) incurred by its share withholding at RSU vesting, and it has been planning to sell shares to cover this. Because of the fallen stock price, financing that tax bill will now be more difficult than expected.
Facebook employees who joined the company during the past 18 months (perhaps half its workforce) were granted restricted stock units (RSUs). This is fortunate for them. Unless the underlying stock price drops to zero, RSUs always have some value. Stock options, by contrast, would be well underwater. as the exercise price would reflect the pre-IPO stock valuation—much higher than the current depressed price. Before the IPO, various option-valuation models gave Facebook stock a worth of $24.10 during the first quarter of 2011 and around $31 in the first quarter of 2012. Now that the stock price is below these thresholds, the golden handcuff would have lost its lure for restless employees.
In this blog we have also discussed Zynga's pre-IPO demand for nonproductive employees to give back large unvested stock grants. Bloomberg has revealed that Zynga is now broadly granting stock options to retain staff after a fall in the company's stock price. Like Facebook, Zynga had previously granted mostly RSUs. The reasoning behind the switch seems clear. Stock options have much more upside than restricted stock. In short, you get more options per grant, and the fixed purchase (exercise) price provides investment leverage. As a result, options have the power to generate much greater wealth from stock-price appreciation than restricted stock/RSUs do. This, in turn, may help to keep employees at the company.
If Facebook believes its stock is unreasonably depressed, we wonder whether it too will start proffering the golden carrot of stock options to motivate and retain employees. This move could also signal some much-needed optimism about Facebook stock. If or when the stock price does rise, these options would be much more valuable and attractive than RSU grants.
9 Top Stocks to Buy in 2014
As a new year approaches, we decided to ask some of our top analysts for their favorite stock idea for 2014. Here are nine companies that look compelling right now.
Jim Gillies : It's hard to find a positive word about IBM (NYSE: IBM) nowadays. Year-over-year revenues have shrunk for six consecutive quarters, it's losing valuable government "cloud" contracts to upstarts like Amazon Web Services, and it seems a lock to win the raspberry for "worst-performing Dow stock of the year award" for 2013.
And yet, the valuation has been punished severely for these sins and arguably more. IBM is still on track to generate in the neighborhood of $16 billion or $17 billion in free cash flow in 2013. That cash will be deployed into its ever-growing dividend (raised 19% annually over the past decade), and into its aggressive share repurchase plan that has reduced share count by 37% over that same decade. And the company still carries the tacit imprimatur of Warren Buffett, who has branded IBM as one of Berkshire Hathaway 's "Big Four" investments.
Something of a contrarian "Dog of the Dow" pick, IBM currently sells for barely 10 times next year's expected earnings, well below the multiple on the average stock in the S&P 500. I expect this year's loser to be next year's winner as the company's cash deployment ratchets up the share price. A multiple expansion to, say, 12 times earnings would be gravy -- holiday gravy, if you will.
Patrick Morris: With the calendar turning to 2014, one stock worth considering is e-commerce giant eBay ( NASDAQ: EBAY ). I've never been one to watch the market movements and attempt to make judgments on a company from those. But the reality is that eBay has been essentially flat over the last year, while the NASDAQ is up almost 40%, and I think that is largely unjustified.
eBay has continued to deliver strong results, and the most recent quarter was no exception. Through the first nine months of the year, its operating income had risen 16.5% relative to the first nine months of last year. Not to mention its payments business (PayPal) continues to watch its revenues grow by more than 18% year over year, and eBay's total quarterly revenue growth has consistently stood at 14%.
So the company is continuing to deliver impressive growth and results, but its price doesn't reflect that. Consider that its trailing price to earnings ratio currently stands at 25.5, which is almost identical to Costco and below the 29 held by Google . I understand that's not exactly a fair comparison, but eBay seemingly still has quite a potential growth runway ahead of it.
The last thing I will note is that many people think eBay is simply a place where people bid on products, but excluding autos, 75% of its transactions were made at a fixed price. Amazon is the clear leader in the rapidly expanding e-commerce space, but eBay has a commanding position in the No. 2 spot.
Matt DiLallo : The Fed might slowly be taking away the punch bowl, but that shouldn't taper the prospect that 2014 will be the year that the housing market finally hits its stride. In fact, The Fed's tapering move just might be what jump-starts the still sluggish housing market. That's why I think homebuilders should do well in 2014, with PulteGroup ( NYSE: PHM ) being the stock I'd buy for 2014 and beyond.
The housing market is currently pretty low on inventory, which is one reason home prices have trended higher. That trend will only continue as we see the end to historically low mortgage rates. Buyers need to move fast in order to lock in these low rates.
Where PulteGroup fits into the equation is that its multi-brand strategy has it well-positioned to really deliver as housing recovers. For example, its Centex brand focuses on first-time buyers. These buyers have been cautious to get into the market, but seeing an end to historically low mortgage rates will likely convince many that the time to buy is in 2014. At the same time rising home prices nationwide are freeing up many current homeowners to sell in order to move up into a nicer home. The Pulte Home brand caters to move-up buyers, while the Del Webb brand focuses on those in the active adult marketplace that are now in a better position to retire and enjoy life.
Bottom line, PulteGroup's multi-brand strategy, when combined with its renewed focus on creating shareholder value, has it well-positioned to deliver exceptional returns in 2014.
Chuck Saletta : If there's one stock I'd consider buying for 2014, that stock would be Kinder Morgan ( NYSE: KMI ). As the largest natural gas transporter and storage operator in North America, Kinder Morgan is well-positioned to profit from increasing demand for natural gas. Between coal power plant shutdowns, an aging fleet of nuclear power plants, and the inherent inefficiency and unreliability of many renewable energy sources, natural gas is the most logical candidate for new power generators.
In addition to the electric generating capabilities, natural gas is generally the cheapest and most common means to heat homes. It's also gaining significant traction as a transportation fuel, especially among fuel-hungry trucks. Regardless of how and where it's used, natural gas needs to get from the shale fields and other sources to where it's needed, when it's needed. That's where Kinder Morgan shines.
The business case is clear, and the investment case is strong enough that I own shares of Kinder Morgan in the real-money Inflation-Protected Income Growth portfolio. Take a business model at the center of the energy economy, and add a reasonable valuation, a covered and growing dividend, and a balance sheet without too much leverage, and the result is a company whose stock is worth buying for 2014.
Brendan Mathews. Liberty Global ( NASDAQ: LBTYA ) is the largest cable company in Europe. It is heavily laden with debt, generates GAAP losses, pays no dividend, and is exposed to Europe's economic woes. For those reasons, you might not be interested at first glance. But, if you dig a bit deeper, the company actually looks very attractive. It's got great leadership following a proven strategy, and it's adding new subscribers and revenue per subscriber.
John Malone, the famous "cable cowboy," is Liberty Global's chairman, and the company is following the same playbook that Malone used to build Tele-Communications into the largest cable provider in the United States, before it was sold to AT&T in 1999. Liberty Global is using cheap debt to acquire smaller cable systems. While it doesn't generate GAAP earnings, the company does generate healthy amounts of free cash flow -- over $3 billion in the past year. Malone is using that cash to upgrade its cable system and aggressively repurchase Liberty Global shares, both of which should generate long-term value for shareholders. Using this same basic strategy, Malone generated more than 30% compound annual returns for Tele-Communications shareholders.
And, despite the economic gloominess in Europe, Liberty Global's business is doing well. Liberty Global is on pace to add 1 million new subscribers this year. Its current customers are buying more services -- 40% of subscribers now pay for a "triple-play" package, up from 30% a year ago. This has driven a 29% increase in revenue per customer.
Maxx Chatsko : Despite nearly doubling the gains of the S&P 500 this year, there are several upcoming catalysts for Momenta Pharmaceuticals ( NASDAQ: MNTA ) that could lead to even bigger gains for investors in 2014. The company's competitive advantage rests in its ability to analyze, characterize, and design complex molecules -- which speeds development time and reduces costs. The MIT rollout proved its novel approach to drug development in 2010 with the approval of its first product, a generic version of Enoxaparin Sodium Injection, which pushed operating margins to 63% on revenue of $283 million in 2011! Unfortunately, competing generics have since eroded the edge for the company's only product.
Momenta will swing back into profits next year if it can market its second product, a generic version of Teva 's Copaxone. Investors were originally waiting for the last Copaxone patent to expire in September 2015, but a summer decision by the Court of Appeals may have expedited the Food and Drug Administration's review date to May 2014. While Teva intends to go to the Supreme Court with an appeal and Momenta isn't the only company with a generic drug ready, simply becoming profitable or even breakeven would smooth out the ride on the road to disruption for investors. I think it's likely generic versions will get the green light next year, which makes Momenta -- with $250 million in cash and an impressive and relatively undervalued pipeline -- a long-term buy-and-hold company at today's prices.
Simon Erickson : My one stock for 2014 is Universal Display ( NASDAQ: OLED ). The company makes organic light-emitting diodes (OLEDs), used to light the displays of consumer electronic devices. Much of the company's history has been devoted to R&D, providing the behind-the-scenes technology for Samsung 's Galaxy smartphones in exchange for semi-annual royalty payments.
But UDC is finally seeing the light at the end of the tunnel. Commercial material sales have begun to meaningfully contribute to the top line – increasing 176% year-over-year and 11% sequentially during the 3 rd quarter. The company reported a solid profit, even without the royalty (which gets paid in 2Q and 4Q). Universal Display is breaking into the market in multiple ways – partnering with the lighting division of Philips . providing materials for a new Samsung OLED television, and is even rumored to be in an upcoming "iWatch" from Apple . OLED is definitely one to keep an eye on in 2014.
Jim Mueller : I'm offering up the latest addition to the real-money portfolio I manage for The Motley Fool, Lindsay ( NYSE: LNN ). It sells mechanized irrigation systems to farmers. You've probably seen these while driving through or past croplands -- big, wheeled piping systems spraying water onto crops.
Irrigating this way is more efficient than gravity irrigation (flowing water across fields), resulting in higher crop yields while using less water (1/3 – 1/2 less). Over the past decade, mechanized irrigation in the U. S. has grown from 35% to 46% penetration, while gravity irrigation has fallen from 50% to 39%.
The opportunity comes from continued penetration gains domestically and international growth. Worldwide, 90% of cropland under irrigation uses gravity irrigation. Thanks to a growing population, farmers will need to produce more food; and thanks to limited water supplies, they'll need to do it while using less water. Replacing gravity irrigation with mechanized irrigation is a big step in that direction.
In addition, Lindsay is developing and selling "smart" systems that use feedback from sensors to distribute irrigation to where it's needed. This makes irrigation even more efficient.
An investment in Lindsay plays into three big, global trends: the two mentioned above (growing population and limited water) and more droughts. With four severe droughts in the last eight years here in the U. S. farmers "don't want Mother Nature to control our destiny anymore."
Tamara Walsh : 2013 proved a record year for Tesla Motors ( NASDAQ: TSLA ). with the stock soaring more than 300% year-to-date. However, 2014 holds even more promise for the electric-car maker. Tesla continues to see strong demand for its Model S cars and is ramping up production to meet that demand. In fact, Tesla CEO Elon Musk says the company is on track to hit an annualized rate of deliveries that exceeds 40,000 cars per year by late 2014. Global demand for Tesla's cars is also accelerating at a rapid clip.
While European sales are already strong, Tesla is just getting started in China and other parts of Asia. The EV maker began taking Model S reservations in China last quarter, and plans to begin deliveries there during the first quarter of 2014. As the world's largest market by sales of premium sedans, China is an exciting piece of the puzzle for Tesla going forward.
Another important catalyst for Tesla is the ongoing expansion of its supercharger network. There are now 34 supercharger stations in the United States, and six so far in Europe. Tesla is now on track to have stations covering 80% of the U. S. population and parts of Canada as soon as next year. Moreover, Tesla plans to cover 100% of the population of Germany, the Netherlands, Switzerland, Belgium, Austria, Denmark, and Luxembourg with superchargers by the end of 2014. This is a significant part of the company's value proposition and it should help drive Model S sales in the year ahead. With these catalysts and more on the horizon, Tesla is a stock I want to own in 2014 and many years to follow.
Leaked: Apple's next smart device (warning, it may shock you) Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here !
The Motley Fool recommends Amazon. com, Apple, Berkshire Hathaway, Costco Wholesale, eBay, Google, Kinder Morgan, Momenta Pharmaceuticals, Tesla Motors, Teva Pharmaceutical Industries, and Universal Display. The Motley Fool owns shares of Amazon. com, Apple, Berkshire Hathaway, Costco Wholesale, eBay, Google, International Business Machines, Kinder Morgan, Lindsay, Tesla Motors, and Universal Display. Pruebe cualquiera de nuestros servicios de boletín Foolish gratis durante 30 días. Tontos no todos pueden tener las mismas opiniones, pero todos creemos que teniendo en cuenta una amplia gama de ideas nos hace mejores inversores. Motley Fool tiene una política de divulgación.
ISO Stock Options Compensation Income Vs. Capital Gains
ISO Stock Options Compensation Income Vs. Capital Gains. By choosing wisely, an employee who exercises an incentive stock option (ISO) may delay any income tax consequences plus benefit from the reduced tax rate on capital gains. The tax characteristics that distinguish an ISO from ordinary stock options are lost by disqualifying actions of an employee. There are five possible ways for an employee to address an ISO.
Exercise and Hold
When an ISO is exercised, there is no tax consequence if the stock is held and not immediately sold. Nothing is added as compensation on the employee's W-2. This strategy defers any income tax. The employee is expecting a gain in the future from appreciation of the stock price. No "bargain element" is added to compensation. The bargain element consists of the difference between exercise price and market price on the date of exercise.
Sell on the Date of Exercise
Selling the stock on the same date as exercise of the ISO results in addition of the bargain element as compensation on the employee's W-2. The sale is still reported as a short-term capital gain. However, the amount of gain is zero because the basis equals the sale proceeds---with possibly a small loss for any sale commission. The basis is the stock exercise price plus the bargain element already added to compensation.
Sell Within One Year of Exercise
When stock obtained from exercising an ISO is sold within one year after exercise, the bargain element is taxed as compensation. If the bargain element has not been reported on a W-2, the employee must add it with other compensation on his income tax return. Any excess of the sale proceeds over the basis is taxed as a short-term capital gain. The basis in the stock is the exercise price plus the bargain element. If the sale proceeds are less than the stock's market value on the exercise date, only the net gain is taxed as compensation. The basis is therefore the exercise price plus the gain. The resulting capital gain is zero. All of the gain is already taxed as compensation.
Sell One Year After Exercise
The sale of stock more than one year after exercise creates a long-term capital gain. This gain is the excess of sale proceeds over the basis. Unless the sale is a qualifying sale, the bargain element must be taxed as ordinary compensation. The basis will then consist of the exercise price plus the bargain element.
Qualifying Sale
To qualify for special tax treatment, stock acquired from exercise of an ISO must be sold more than one year after exercise and more than two years after the options were granted. In this case, the sale is a long-term capital gain. The basis will only be the exercise price. The bargain element is not taxed as ordinary compensation. However, even if qualifying sale requirements are met, when the option exercise price is below the stock's market value on the option grant date, this discount is still taxed as ordinary compensation.
Unvested RSUs As Golden Handcuffs: What To Do?
by Harry Sit on March 14, 2012 24 Comments
As I mentioned in last Friday’s post, I had interviews for a new job. The interviews went very well. They liked me; I liked the company and the job. After the interviews, the hiring manager gave a verbal go-ahead. Now I’m handed off to HR to talk about the compensation package.
This turned out to be a good exercise to take an inventory of my current compensation. My unvested RSUs became a point of discussion. I come to realize how strongly these to-be-vested RSUs act as golden handcuffs.
RSUs are Restricted Stock Units . They are basically a deferred bonus calculated and paid in shares of the employer’s stock. Unlike a cash bonus, you don’t get it right away. They become yours ("vest", "lapse" or "released") over a number of years. Mine vest 25% each year over 4 years.
When you first get the RSUs, it’s not that big a deal. After you divide the value by 4, it comes out to just a few percentage of your salary.
It gets a little better by the end of the second year. Even if you sell the shares as soon as the RSUs vest, which you should, because there is no tax advantage to hold them, you still get 1/4 of the RSUs granted at the beginning of the first year, plus 1/4 of the RSUs granted at the beginning of the second year. That’s double the value from the previous year.
Things get really interesting by the end of the 4th year. You are collecting 1/4 from each lot granted in the previous years, for the full value of the annual grant. This continues as each year goes by, as shown in the chart below:
I looked at my pay history. My current employer granted on average about 20% of my salary in RSUs each year. I already worked here for more than 4 years. Each year I get about 20% of my salary from the RSUs becoming vested. I’m only paid this money now for the work I already did in the previous years.
It’s very hard to walk away from this. If I leave now, even if the new employer also grants the same amount in RSUs, which it doesn’t, I will have to restart the cycle, collecting 1/4 in the first year, 1/2 in the second year, 3/4 in the third year, versus the full amount every year. Basically I will lose 1-1/2 times the value of the annual grant over a 3-year period. To me, that’s a 10% pay cut for 3 years.
I like the new job, but I’m not that desperate for a pay cut. I may end up turning down this new job.
Do you get RSUs at your job? What percentage of your base salary is the annual grant worth? Have you been in a situation like this? What do prospective employers do to unlock the golden handcuffs?
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Thank you Leigh for sharing your experience and suggestion. It sounds like you only get an initial grant but not additional grants annually. I was talking about the annual grants. Say I get 1,000 RSUs at the beginning of the 3rd year, to vest over the next 4 years, and the price was $10 per share. I value that grant at $10,000. If my salary was $50k at that time, then it’s 20%. I also get a separate cash bonus, which comes to about 15% of my base. Just curious if my current employer is over-generous in its annual grants. The prospective employer only targets 10% of base in its annual grants.
Both companies vest 401k matches immediately. The matching rates are comparable.
My employer operated the way yours does — annual refresh grant that vests in equal installments over 4 years. In my case the grant was around 20% of my base salary, or around 15% of my base + typical bonus.
When I left to join another company, I had somewhere around 50% of my salary in RSUs that I was going to leave on the table. The new employer matched that (though again vesting over 4 years), which helped make the decision to change employers. I later left the new employer and returned to the old. Unfortunately, when rejoining the old employer, they did not re-match the grant, so the move cost me overall a big chunk of $$ in RSUs.
However, in my case that was compensated for in other ways. Among others, I negotiated a higher cash signing bonus to help make up for it.
But yes, the ‘golden handcuff’ effect is very real. For my wife, who is more highly compensated than I, changing employers would mean leaving a mid-6-figure option/RSU package on the table. It is challenging for a new employer to match that, and that has certainly factored into her employment decisions.
I do get additional grants each year, but I haven’t been here long enough to figure out how that actually works in entirety. I think my employer awards them not based on a specific vesting period, but a different vesting period for each person.
What about health insurance? Will your costs go up with the new employer?
@xyz – Thank you for sharing your experience as well. I think a signon bonus is the way to go. The prospective employer is open to that but it won’t completely compensate for the unvested RSUs. So far it’s only willing to pay 50% of the value due to vest in the next 12 months. Nothing for the RSUs vesting beyond 12 months. Maybe I should also ask for a delayed bonus at the one year mark.
@Leigh – I haven’t asked them about health insurance yet. Both employers are large publicly traded companies in S&P 100. I’m not too worried about that yet when we still have a much larger gap to fill.
I Am 1 Percent says
I’m in the same boat. I get about 30% of my base in RSU from my company. My differ in how they vest. Mine fully vest after 3 years. I’ve been with my company for 7 years to every year I get a 30% bonus in RSU’s on top of my annual cash bonus of about another 30%.
The RSUs have kept me at the company because other companies don’t even offer a sign-on close to 1 year’s worth of RSUs….tough one.
IME, companies are generally willing to be flexible on signing bonuses (since they are one-time payouts). For example, I moved from company A -> B -> A. From B -> A, A had a relatively low cap on the signing bonus, until I discussed it in terms of compensation for lost stock options. At that point they were more receptive.
In other words, they weren’t willing to give me a large signing bonus just for asking, but if I had a good justification for asking, and made that case with a well reasoned argument, they were willing to be somewhat more flexible.
Now, obviously this will vary from industry to industry and from company to company. In my case A and B are both mega-cap companies, and my field is computer engineering. I’ve heard that computer programming can have far more lucrative signing incentives.
Nish The Dish says
The question to be answered is “Why are you looking for a new job?”
We always have to overcome the inertial effect that is the built up equity of your current job. I am sure your hard earned reputation at your current job is worth more than the annual cumulative effect of your RSU’s (10% of pay). So if you are willing to leave that intangible equity on the table in search of a better tomorrow, then why should the 10% pay cut be the deciding factor?
Having said that, you can ask for a sign-on bonus to cover the 3 years of lost 1/4’ly RSU payments.
@Nish The Dish – Good question. Why look for a new job? To me, it’s stagnation and feeling under-appreciated. I believe I built up a good reputation but I don’t see how the reputation is being rewarded, but rather taken for granted, except by the lockup effect of the RSUs. I don’t want to just bide my time punching the clock, but I’m not motivated by a pay cut at all. If I’m paid well to punch the clock, I will punch it while I look for the next opportunity.
TFB – if your prospective employer is only willing to compensate you for 50% of the RSU’s that will vest this year, you are leaving an awful lot on the table at your old employer. If you get 20% of salary in RSU’s and they vest over 4 years, it seems you will have a constant balance of 80% of salary tied up in these golden handcuffs.
I work for a Large Fortune 25 company, and the RSU percentage is determined by your level of management. A mid level supervisor may get 20% of salary in RSU’s. I am just into upper management and my target is 37.5%. Mine vest over 3 years, starting in year 3. I am basically always sitting on 4 full grants, amounting to 1.5x my salary. I had a buddy get forced out a few years ago and it was very painful for him to leave. He was forced to leave the RSUs on the table, and the company where he found a new job didn’t give him much of a signing bonus….nowhere near what he left behind.
Obviously, you may feel the opportunities at the new company are worth the risk. Just don’t underestimate the cost of leaving. Those golden handcuffs sure are designed well
Yes, Andy, handcuffs are bad; golden handcuffs — not so bad.
TFB – I laughed out loud at your post 11. Priceless. RSUs vary from industry to industry, and company to company. (I know, obvious.) I worked at a company that was so clueless, they gave the Corp guy who handled expense reports 20k RSUs (not in dollars – actual RSUs) while giving one of my field groups, comprised of 17 people, 15k to split between the entire team. Not surprisingly, much turnover ensued, including me.
I’m at a company now that is far more generous, though they award them to a smaller % of the employee base. I have seen no correlation to base pay or salary in general (given the wide range in comps, that’s understandable).
One question I have learned to ask is ‘where does this offer sit in the range?’. I point out that I’ll find out once I’m onboard and that lessens the recruiter’s likeliness to exaggerate. You don’t want to be impressed with what you think is a high offer just because it’s higher than your current comp package…only to find out the new company pays significantly higher and the recruiter low-balled you. I refused to come aboard my current employer without a confirmation that I was above the median even though the initial offer was a 12% raise over what I was making at my then-current employer. Oh, and forget about stock options, obviously. Nice to have, don’t throw them away, but don’t count on them anymore.
Wai Yip Tung says
You already do all the math. The only thing I’d add is I’ll constraint the comparison to next 2 or maybe 3 years. Looking too far into the future introduce too many variables and there is always a chance for you to switch company in the next few years anyway. (it is like comparing ARM v. s. 30 years fix rate mortgage). By all mean take your RSU number and use it to negotiate with company B.
At then end of the day, you compare the final offer to your current offer. You may find that A > B. So your rational optimization function tells you to pick company A. Period.
I was in this situation and I picked company B. In my case, company A is big, stable, boring, staid but is also cash-cow. Company B a small startup, dynamic, position in a great innovative space. However it is cash flow negative in the foreseeable future. Company B match company A’s base salary. But some simple accounting tells me the total pay, including RSU, expected bonus, 401k match, etc. is likely to be 30-40% more for A. Like most tech startup, company B promises pre-IPO stock options. To some people, this may look like a chance to be a millionaire. But I’m too sober and I have some idea what the expected value would be and it most likely will not nearly compensate the 30-40% cut.
At some point, I tell myself to turn off rational thinking. The base is enough for me to make a living. And I would have betrayed myself if I stay in company A year after year because of the golden handcuff. Among the many good thing to work for company B, one of them is the commute. With company A, it is a frustrating hour long commute that bound me to a rigid train schedule. With company B, it is a 15 minute bike ride. It is flexible and I can pickup things I need along the way. In the morning I would ride along the waterfront, looking at the open view and the blue sky and I often tell myself, “What a lovely day it is!” How much value will you place on feeling like you have a lovely day? I think it easily value 20k or even more. Most people put $0 value on their commute. I think this is the most undervalued benefit in most people’s calculation.
To sum it up, sometimes I decide to turn off rational calculation and just go with my heart.
Levels of RSU’s vary at our company. In my position, I receive annual grants that currently equal 57% of my base. The vest in three years. Further, I receive a similar amount of performance shares that also vest in three years and they have paid out at about 50% on average. There is also the ability to get additional amounts of each based on personal performance levels. On top of this, there is an additional 10% of salary placed into the cash balance pension plan at the end of each year (on top of the base of 5%.). If you add it all up, a competitive offer is almost out of reach.
The way things work at my company is that annual bonuses are cash for the first $20k, then 90% RSU,10% cash for the rest of the bonus. The RSUs vest in three years, 0%, 50%, 50%.
What is probably more relevant to this discussion is the job change my husband went through three years ago. He left a stable company that he had 15 years with (X) to join another stable well known company (Y) in the same highly competitve industry. Company X had been cutting back on compensation and he had not gotten any option grants in the last 3 years (he never got any RSUs there). So, he was fully vested and didn’t have to leave anything on the table. One of his concerns was that if he got laid off at X he would have a substantial severance (1 year or so) to adjust and find a job. If he got laid off at Company Y he would have no tenure and a minimal severance. Company Y provided RSUs amounting to about $30K that vested over 3 years (33% each year). They also provided about 5600 options at the current stock price, vesting the same way. This severance concern seemed to work as leverage in the negotiations. He also got about a $50K bump in pay, so it has worked out well.
Have you thought about trying to get your current company to counter their offer? Or provide a specific assignment with career development that you are looking for?
Interesting discussion – I have a portion of my comp. awarded in RSUs. Percent and schedule not really relevant. But here’s my question – What happens to your RSU’s when you formally retire? My current plan is that the remaining RSUs are forfeited. I wonder if that is the industry norm? It’s under discussion at my firm, so things may change – I hope. Is anyone else faced with this connstraint/penalty? ¡Gracias!
At the two employers where I’ve worked, you generally lose your RSUs if you retire before age 60. However, if your retirement is qualified, which generally means that you have ‘x’ years at the company, you get accelerated vesting of options and RSUs, so you don’t lose them (but you do have to cash them in within ‘y’ days of official retirement)
Also, there are times when early retirement packages are offered to certain employees. In those cases, equity award vesting is sometimes (but not always) also accelerated.
I haven’t read through all the comments, but you should be asking the new employer to compensate what you lose through a sign on bonus in cash + RSU. The big big (usually unpredictable) is company performance. If old company stock is a dog and new company stock has double digit potential growth, it makes the math a lot harder and your case a lot weaker.
My employer has an interesting twist on the golden handcuffs. We have RSUs which vest 0%/0%/100% over 3 years. And we have stock options which vest 40%/30%/30%. They’ve valued 100 RSUs as being equal in value to 500 stock options. Every year I have the choice of taking 75% RSUs/25% Options, 50% RSUs/50% Options, or 25% RSUs/75% Options. So I might have the choice of 750 RSUs/1250 Options, 500 RSUs/2500 Options, or 250 RSUs/3750 Options. My general conclusion has been that if I’m confident I’m going to be there for 3 years, 75% higher RSUs are a better deal, but if I think I might leave after 1 or 2, it’s better to go heavy options since RSUs won’t vest over that timeframe.
So what happens if I had stock grants that vested and I didn’t do anything with them? Will they always be available for me to sell?
Maria – Vested stock grants are yours to keep. You can sell them at any time, even after you leave the employer. Stock options are different. They have an expiration date even after they are fully vested. Expiration date accelerates when you terminate employment.
GUNDOGAN COSKUN says
I am new to job offers with RSU benefits. can someone explain me how RSU is calculated? is it montly salary or the annual gross-cum that is put on my package with certain percentages?
Mark Pottsdam says
Had a similar situation recently, looking at a new job offer and weighing up the pros and cons of walking away from unvested shares held as part of a deferred bonus due to vest in the next couple of years. I found out that my boss had needed to make the same type of decision a few years back, whether to leave my old firm or not, I realised that he and several others above me were now waiting year after year for deferred remuneration to be paid to them. It was clear to me that it was very unlikely that any of the 3 or 4 people immediately ahead of me were likely to leave the firm any time soon as they had too much to lose. Two things occurred to me, first It would be a long time before I really got to rise up to the responsibility that I know I can handle and that would drive me insane and secondly I would feel miserably trapped if I knew I had to sit in the same chair and listen to the same old BS just because I felt that leaving would cost me financially.
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Date: Wed, 26 Jun 2002 From: Loai
If I have bought stocks through an ESPP (employee stock purchase plan), how long do I have to hold them for them to be considered long term? One or two years?
Gracias de antemano por su respuesta.
Responder
Date: 09 Aug 2002
In order to qualify for long-term treatment, the stock must be held more than two years after the grant (subscription) date and more than one year after the exercise date. Confirm these dates with your employer. Also, remember you will still report ordinary income when you sell the stock based on the discount available at the grant date. If the holding period requirements are met, the ordinary income is the lesser of the gain from the sale of the stock or the discount as of the grant date.
There is no “escape hatch” for ESPP shares like for ISOs, so avoid disqualifying dispositions. The ordinary income for a disqualifying disposition is the excess of the fair market value on the date of exercise over the option price, not limited to the gain at sale.
For more answers to our readers’ questions and to learn about new tax developments relating to employee stock options, subscribe to our newsletter, Michael Gray, CPA’s Option Alert!
IRS Circular 230 Disclosure: As required by U. S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U. S. Internal Revenue Code.
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One college student rides the Tesla stock wave
Patrick Hop admits that everyone told him he shouldn't do it.
A year later, he's glad he ignored their warnings.
The 22-year-old student at the University of California, Berkeley invested $30,000 into Tesla stock a year ago and has parlayed it into an investment worth approximately $250,000 today.
"I was always preaching to my friends, 'Tesla's gonna be huge' and my friends thought I was crazy," said Hop. "Now my friends are surprised this has actually worked."
Officially, Hop's gains are all on paper. But that paper keeps going up in value. On Friday, Tesla shares climbed above $160 for the first time ever—meaning the stock is up more than 400 percent in the past year.
Letting it ride on TSLA
Hop, made in his initial investment in Tesla a year ago when the stock was trading at $32. When Tesla stock took off, Hop went along for the ride. When it soared to $115, he dumped the stock. But instead of pocketing a huge profit, he reinvested the money into Tesla call options that expire in January 2015 with a strike price of $130.
"I figure it wasn't that risky going into those options," said Hop. "And I'll probably dump those options in the next month or two."
When it's all said and done, it remains to be seen exactly how much of a profit Hop will make off his initial investment. Still, the college student who hopes to someday start up his own company thinks his strategy of investing heavily in one company was the right thing to do.
After all, Hop considers himself a Tesla expert since he spends extensive time researching and tracking Tesla. "I'm a big believer in their battery technology."
As Tesla shares climb to a new high, it's renewed the debate about whether or not shares of Tesla are overvalued? Or should analysts look at Tesla with the valuation of an auto company or a tech company?
"We're an automotive tech company," Tesla CEO Elon Musk told CNBC Thursday on the automakers plant floor in Fremont, Calif.
"I'm not a fan of trying to pump the stock or trying to convince people the stock should be higher, or even convince people the stock should be where it is now. I actually think the value of Tesla right now, the market is being very generous and it's obviously giving us a lot of credit for future execution."
Investors are betting that Tesla can expand sales from a projected 21,000 this year to well over 100,000 in three to four years when the company rolls out a lower-priced third-generation car. So there's a lot of execution risk built into the bullish sentiment surrounding Tesla right now.
Nobody is more aware of that risk than Musk.
"I really think the valuation we've gotten is more than we have any right to deserve honestly," said Musk. "We need to make sure we knock the ball out of the park in the coming years."
Betting on Tesla, banking on Musk
When Hop thinks about the risks that could bring Tesla shares, and his sizable investment, crashing down, he worries about earthquakes and Musk stepping down as CEO. "There's definitely some outlying risks with Tesla and Elon leaving is one of them," he said.
Fortunately for Hop, Musk isn't leaving Tesla anytime soon. He's committed to running the company at least through the projected ramp up in production of a third-generation car, which is at least three to four years away.
"I think I get far too much credit for the success of Tesla," said Musk. "The reason we've been successful is because we have a team of people who work super hard. I'm the one who talks about the results but it's not me who did it really, it's the team here who did it."
"Teslanaires" hope Musk and his team continue doing what they're doing.
As for Hop, he's yet to buy a Model S. If and when he cashes in his Tesla investment, paying for a $70,000 Model S shouldn't be a problem. "I'll probably buy one at some point," said Hop.
Dividing Property
California is a community property state, and as a result, the basic principle that governs the division of assets upon divorce seems simple enough. Each spouse is entitled to one-half of the property that was acquired during the course of the marriage. As basic as this sounds, the financial reality of dividing assets can be complex. Remember, upon divorce you and your spouse are essentially selling everything you own to (a) each other, or (b) a third party.
Spouses who mediate their divorces enjoy the ability to divide their assets in the manner that best meets their respective needs. Allowing a judge to manage this task often leaves both parties deeply dissatisfied. Nevertheless, gaining a basic idea of how a judge might divide property if negotiations fall apart is a useful place to start.
Basic Legal Principles
Before property can be divided and distributed, it must be characterized as "separate property," "community property," or "quasi-community property."
Separate property . Any property acquired before marriage or after separation is considered the acquiring spouse's separate property. The time of acquisition is therefore important, and is typically set at the time when the original property right arose. For example, this would be the date a contract was signed to purchase an automobile, not the date the DMV confirmed title.
Property acquired by "gift, bequest, devise, or descent" is also characterized as separate property. For example, if your father leaves you $100,000 in his will, that money is your separate property. Likewise, if your spouse gives you a diamond necklace, the gift is your separate property.
In addition, any assets acquired after the date of separation (but before divorce) are considered the separate property of the acquiring spouse. For example, if your date of separation is June 15, and you buy a new automobile on September 15 using payments you received in the interim as temporary support, that automobile is your separate property.
Community property . All property acquired during marriage and before separation, other than by gift or inheritance, is presumptively community property. This includes all compensation, regardless of the form it takes, a concept that will become more importance when determining how much (if any) child support or spousal support is appropriate. The following are examples of compensation:
Stock in lieu of salary
Employer contributions to an employee profit-sharing plan
Incentive stock options
A"gift" from an employer (of real estate, for instance), which is in reality deferred compensation in lieu of a pension
Vacation pay, or the right to receive certain other financial benefits as deferred compensation upon termination of employment
All earnings from a privately held business are considered community property to the extent they reflect either spouse's participation in the business. On the other hand, earnings that don't reflect the labor or skill of either spouse are considered a return on a capital investment. As a result, these earnings are instead characterized as separate or community property based on the date of the original investment. This may sound confusing at first blush, but the concept makes sense. Consider the following example:
Before marrying Sue, John Smith invested in a fast food franchise along with two of his close friends. The franchise did fairly well, but by the time John and Sue were married, he was a completely silent partner. He did nothing more than collect his share of the profits generated by the franchise. The income generated by the fast food franchise that is payable to John will be considered his separate property. He did no work to generate those profits during the course of his marriage to Sue. The "seed was sown" before they were married. Therefore the earnings from the franchise are not community property.
Contrast the previous example with the following: Before marrying Sue, John opened an accounting practice. Getting started took quite a bit of time, and the practice wasn't even profitable by the time he married Sue. In this case, valuing the business will be quite difficult. Some portion of goodwill is attributable to the work John did before marriage, but the income derived from the practice after marriage clearly reflects John's labor and skill, and is therefore community property. In a case like this, and outside expert may be required to properly value the business.
As a general rule, simply remember that any asset obtained or income earned during marriage is community property. This includes the right to receive income in the future - for instance, through a grant of stock options or some form of deferred compensation.
California Family Code Section 910 states that all debt s incurred during the marriage and prior to separation are community property. It doesn't matter whether the debt was incurred by one spouse for his or her own benefit or for the benefit of the family. It also doesn't matter whose name appears on a bill or a credit card statement. If it was incurred during the marriage and prior to separation, it's a community property debt and both spouses are equally liable for its repayment.
Quasi-Community Property . California Family Code Sections 125(a) and 125(b) define "Quasi-Community Property." In short, quasi-community property is real estate and personal property acquired by a spouse while living out of state that would have been community property if the spouse had been domiciled in California. The definition of quasi-community property also includes any property that is acquired in exchange for such property. Quasi-community property is a means for California courts to obtain the authority to dispose of non-California assets in a divorce.
Additional Important Concepts
Date of separation . In dividing earnings and income during the divorce mediation process. the date of separation becomes a very important point of reference. California Family Code Section 771 indicates that "separation" requires more than a rift in the spouses' relationship. The "date of separation" occurs only when the parties have parted ways with no present intent to resume their marriage. The conduct of the spouses must demonstrate a complete and final break in the marital relationship.
Date of divorce . Unlike earnings and income, which lose their community property nature after the date of separation, community property assets are valued as near as possible to the trial date . According to California Family Code Section 2552, "the court shall value the assets and liabilities as near as practicable to the time of trial." In other words, if a community property asset appreciates significantly during the interval between separation and divorce, that appreciation is split evenly between the parties.
For example, Sue and John agree that their marriage is troubled. On August 1 st they decide to separate to "test the waters." John moves out of the house. They both agree that they want to preserve the possibility of getting back together. December 5 rolls around, and John sends Sue a letter stating that the marriage is over, he isn't coming home, and he wants a divorce. The date of separation is December 5, not August 1. The decision to separate on August 1 is too tentative to reflect the "date of separation" under California law. Any earnings or assets accumulated between August 1 and December 5 are community property.
Transmutation . As set forth in California Family Code Section 850(a)(b) and (c), spouses may agree to change the nature of any or all of their property. In other words, they can agree to change separate property into community property and vice versa. This may be accomplished by a marital property agreement. In addition, California courts will typically honor premarital agreements that are entered into freely and knowingly, and which alter each spouse's property rights as set forth by California law.
Assets v. income . This distinction may seem unimportant at first glance, but keep in mind that the two have very different consequences during divorce. Community property assets are divided equally, while income is used to determine how much alimony and child support is appropriate.
Asset Division, Practically Speaking
The intense stress of divorce often causes couples to ignore the many costs associated with dividing or selling assets. The consequences of doing so, however, can resonate for years to come. As with any other aspect of your divorce, you will benefit greatly if you and your spouse reach a fair settlement outside of court. Keep in mind that courts do not typically account for the various costs associated with maintaining and selling various assets, such as insurance, maintenance fees, commissions, and taxes. Nowhere is the disparity between the legal reality of divorce and the financial reality more glaring than when your assets are divided.
Consider the following simple scenario: John and Sue Smith are in the midst of a divorce. The Smiths have $100,000 in cash and shares of a mutual fund valued at $100,000. Despite the poor state of the economy, the mutual fund has done quite well, returning nearly 8% per year. Clearly the mutual fund has done much better than the tiny return earned by cash in a savings account. Therefore, it might seem that if the cash goes to John and the mutual fund to Sue, Sue is in a good position. After all, why not stick with a winning investment?
In reality, Sue is getting a raw deal. All of the accumulated capital gain will be taxed when the mutual fund is sold, and Sue will be wholly responsible for paying the taxes. If the Smiths held the shares for many years and the value of the shares rose significantly, the tax bill could be substantial - many thousands of dollars. The net effect is this: John is getting a better deal by walking away with cash.
Dividing the Investment Portfolio
If you have a financial advisor, consulting with him or her will be an important part of the divorce process. He or she may be able to assist you in determining how to appropriately value and divide certain assets. Determining the true value of various assets ranges in difficulty from incredibly simple to fairly complex. The following will get you started:
Cash and receivables . Simply perusing your bank account statements should give you an accurate picture of the amount of cash you hold. Don't forget to search your files for copies of any receivables (i. e. money due to you under a personal loan). Many families loan money to other relatives on an informal basis. While formalizing such loans is essential and avoids the inference that such a loan was actually a gift, you'll nonetheless want to get a handle on all loans (informal and formal) you or your spouse have made to other individuals.
Stocks and bonds . If you use a brokerage firm or an online service to purchase your stocks, you can either (i) call the firm's trading department and ask them to give you the current price of a stock or fund, (ii) simply check the business section of the paper, or (ii) locate the price on any one of the numerous financial websites that crowd the internet. Your brokerage firm should be able to help you with the value of your bonds.
Insurance . Assuming you are listed as the owner of the policy, the insurance company or broker who obtained the policy for you should be able to give you the policy's current value and surrender value. If you don't own the policy and you have a cooperative spouse, ask your spouse to provide you with the required information. If you are embroiled in litigation, this information may have to come out during the discovery process.
Collectibles and other personal property . A highly regarded estate planning attorney once remarked, "The second you walk out the shop door with a piece of jewelry or a collectible, you've taken a 50% loss." There is a great deal of truth to his off-the-cuff comment. Collectibles are rarely worth as much as their owners like to believe. The key here is to get an appraisal. When valuing an item, make sure you use its resale value, not its retail price. Unfortunately, you may hear a host of different values according to who is performing the appraisal. The trick is to find a valuation that both you and your spouse find acceptable.
The closely-held business . Because they aren't listed on the various exchanges and therefore can't be sold easily, sole proprietorships, partnership interests, stock in privately held corporations, and membership interests in limited liability companies can be quite difficult to value.
Appraising a private business is part art, part science. In a contested divorce, valuing a small business can turn into a battle of appraisers. Thankfully, though, valuing a company is less of a guessing game than it used to be, partially due to a constantly growing database of information on comparable sales, which can be accessed through entities such as BizComps and the Institute of Business Appraisers.
While a public company can fetch upward of thirty times its earnings on the market, a private company may be lucky to sell for five times its annual earnings. Buyers place a premium on one simple factor: predictable and growing cash flow. Of course, if your business happens to hold promising intellectual property, an appraisal based on cash flow isn't appropriate.
Certain intangibles also affect the value of a business. Location can be very important. A technology company in San Jose might garner a higher bid than a rival in Stockton simply because the quality of the workforce and its proximity to the industry's nexus. Likewise, a company that manufactures a car part with ten customers will fetch a lower price than a competitor of similar size that boasts fifty reliable customers because it doesn't enjoy a revenue source that is quite as a diversified.
A private company that is on the cusp of going public will undoubtedly fetch a much higher price than one that is less growth oriented, and a company that is likely to be sold to a "strategic buyer" - one that will use the company to expand its product line or territory - will garner a generous price.
Sound complicated? It certainly can be. If you own a "mom and pop" store that has maintained fairly consistent revenue over the course of two decades, valuation should be relatively simple. If you own a company that is growing like mad, or that has developed some particularly valuable intellectual property, you will need a great deal of help. This comes at quite a cost, but it is the only way to get a reasonable ballpark figure.
Selecting the right professional to appraise your business can be equally daunting. A CPA with no specialized training is business valuation is probably a poor choice, while one who is a certified valuation analyst is a better bet. A mergers and acquisitions specialist may also be able to provide you with a reasonable appraisal.
If you're serious about getting your business appraised, keep in mind that this can involve quite a bit of work on your part. Already emotionally exhausted from your divorce, the last thing you'll want to do is gear up for a true valuation. You can expect to produce several years' worth of financial statements and explain them in excruciating detail.
How much does a business appraisal cost? It varies according to the size of your company, but to give you a general sense of the fees involved: A business with less than $1 million in annual sales and good record keeping might incur a fee of $5,000. A company with $15 million in sales could pay many times that amount simply due to the complexity of its accounts.
Stock options . An increasingly important part of many employee's compensation packages, stock options require careful consideration during the divorce process. Stock options are deceivingly simple compensation contracts. When an option is exercised, its payoff rises by one dollar for each dollar the stock price is above the exercise price (also called the strike price). If the stock price is below the exercise price when the option matures, the option is not exercised and it has zero payoff. Despite the basic nature of this concept, few employees truly grasp all of the implications of option ownership. Indeed, survey after survey has shown that employees tend to place unrealistic expectations on their options and hold them in higher esteem than their value merits.
The complexity of dividing options upon divorce depends on whether the options have vested or not. If a spouse's stock options have vested during the course of the marriage, the options are clearly community property and are therefore subject to equal division. However, the situation gets more complicated when some or all of the options haven't vested yet.
California courts acknowledge that unvested options, though they have no present value, are subject to division. The manner in which a court determines what portion of the unvested options belongs to each spouse varies from case to case, and a judge has wide discretion in deciding which formula or approach to use in allocating options. In general, the longer the interval between separation and the date the options vest, the smaller the portion allocated to the non-employee spouse will be. For example, if a significant number of options vest only a few months after separation, a large portion of those shares will be considered community property. However, if a significant number of options vest three years after the date of separation, a much smaller portion will be considered community property.
In most cases, a court will use one of two formulas when determining how many options should be considered community property. Before applying one of the formulas, though, a court often determines whether the options were granted to the employee as a reward for past services, to attract the employee to the job in the first place, or as an incentive to stay with the company in anticipation of future job performance.
If the court determines that the options were granted to the employee spouse (1) as a reward for past service, or (2) as an up-front incentive to attract the employee to the job, the following formula may apply:
[(DOH - DOS) / (DOH - DOE)] x shares exercisable = community property shares
Where DOH = Date of Hire DOS = Date of Separation DOE = Date Options May Be Exercised
To illustrate how this might work, let's use the example of John and Sue Smith. John and Sue live in Silicon Valley. John started working at a start-up company, TechComp, on January 1, 2010. After three years at TechComp, the CEO expressed his delight at John's performance by offering him 1,000 options, exercisable on a four-year vesting schedule. In other words, 250 of John's options vest each year. For the last three years John exercised his options in accordance with his option agreement. Because 750 shares of TechComp vested during his marriage to Sue, all 750 shares are clearly considered community property. However, on August 2, 2016, 152 days before John earned the ability to exercise the last 250 options, he and Sue separated.
Applying the formula set forth above, then, we have:
[(DOH - DOS) / (DOH - DOE)] x shares exercisable = community property shares
[(2405 days) / (2557 days)] x 250 shares = community property shares
235 = community property shares
Note that the vast majority of the shares that vest on January 1, 2017 are considered community property. This makes sense, as the reason behind granting the options (rewarding John for past performance) hinged upon his performance during the marriage.
Contrast the above formula with the approach that is used when options are granted as an incentive to keep an employee with a company:
[(DOG - DOS) / (DOG - DOE)] x shares exercisable = community property shares
Where DOG = Date of Grant DOS = Date of Separation DOE = Date of Options May be Exercised
To illustrate how this formula works, and how it generates a different result, let's alter the facts in the John and Sue Smith example set forth above. This time, on January 1, 2013, after John has worked for three years with TechComp, the CEO becomes worried that John may leave, and as an incentive to keep him around, he offers John 1,000 options, vesting on the same four-year schedule.
Applying the formula set forth above, we have:
[(DOG - DOS) / (DOG - DOE)] x shares exercisable = community property shares
[(1309 days) / (1461 days)] x 250 shares = community property shares
223 shares = community property shares
Clearly the two methods offer different results when it comes to calculating the number of options that should be considered community property. In the end, if you decide to litigate your divorce, the judge will decide which method he or she prefers (or indeed, use another method entirely). If you and your spouse mediate your divorce, the two formulas can provide a reasonable backdrop for your discussions.
Of course, the analysis set forth above is only the tip of the iceberg when it comes to stock options. Stock options and other equity incentive devices come in many formats. Two commonly seen iterations include incentive stock options (ISOs) and nonqualified stock options (NQSOs).
ISOs can only be granted to employees of the underlying company and benefit from favorable tax treatment. Upon exercise of ISOs, the employee does not have to pay ordinary income tax on the difference between the exercise price and the fair market value of the shares issued. Rather, if the shares are held long enough (one year from the date of exercise and two years from the date of the option grant), the profit from the sale of the shares is taxed at the long-term capital gains rate.
NQSOs don't qualify for the special treatment granted to incentive stock options. Instead of being taxed at the long-term capital gain rate, NQSOs are taxed as income to the recipient at the time of exercise. As you might expect, this less favorable tax treatment comes with far fewer restrictions with regard to the timing of exercise.
Regardless of the nature of the equity incentives you or your spouse have earned, you should consider enlisting the help of an accountant or other executive compensation specialist in determining how the taxation of your incentives will affect their value. The IRS rules with regard to the taxation of stock options transferred between spouses upon divorce are fairly complex, and you will most certainly appreciate the help.
Spouses frequently "trade" options for other property when negotiating a divorce settlement. A spouse who has labored away at a start-up company may feel strongly about retaining all of his or her options, though this insistence on retaining all the options is typically misguided. To many employees, stock options represent a chance, however miniscule, at striking it rich - a dream that doesn't typically accompany a "boring" standard salary. Before trading the right to options for other property, it is important to get a firm grasp on options' value. Various models of valuing options exist, and when dealing with early-stage startup companies, the process is more art than science. As with deciphering the tax implications of transferring options upon divorce, enlisting expert help when valuing options will greatly ease the strain of the divorce process.
Retirement Benefits
Like virtually everything else, a retirement account is considered community property to the extent the retirement benefit was earned during the course of marriage. Dividing a retirement plan is no small task, and the mechanism used to effectively split a plan varies according to the type of plan in question.
First, note that most retirement plans broadly fall into two categories: (1) defined benefit plans, and (2) defined contribution plans. Defined benefit plans are often called pension plans, and in such a plan, an employer often pays the employee a monthly sum until the employee dies. Defined contribution plans, on the other hand, often constitute a mixture of contributions by both the employee and the employer. A 401(k) plan is an easy example of a defined contribution plan. An Individual Retirement Account (IRA), while a close cousin of the defined contribution plan, stands on its own.
Valuing a defined benefit plan can be difficult simply because doing so involves actuarial calculations. In other words, the value of the plan depends on several variables, including the rate of inflation and the life expectancy of the beneficiaries. Dividing such a plan is therefore correspondingly complex. A defined contribution plan or an IRA is much simpler to value, simply because the plan administrator will report the current value of the account to holder in regular statements.
What portion of a plan is community property? A simple calculation is typically used to determine how much of a retirement plan is community property. First, the total number of months of plan participation is determined. Next, the number of months of plan participation between the date of marriage and the date of separation is determined. Finally, the first number is divided by the second to obtain the percentage ownership interest. Consider this example:
John Smith works for a manufacturing company that offers a generous defined benefit plan (a pension). He has been accruing retirement under the plan for 23 years, and he has been married to Sue for 19 of those years. The percentage of the plan benefit that is community property is therefore 83% (19 divided by 23). Sue is therefore entitled to ½ of the community property share (or 41.5%), while John is entitled to both ½ of the community share and his separate property share (a total of 58.5%).
The method has a drawback, of course, and that is the simple fact that the contributions to the plan early in employment (typically when salary was lower) are less valuable than the contributions made later in employment (when salary is large). A precise calculation may require the help of an actuary, pension administrator, or financial planner.
Sometimes spouses are shocked when presented with the actual present value of a seemingly sizeable plan. We all know that a dollar today is worth far more than a dollar ten years from now. Nevertheless, the degree to which the "present value factor" can diminish the current value of the plan is often startling. Here's an example using simplified data:
John Smith is 42 years old. Upon retirement at age 65, his plan will pay him $20,000 annually for the rest of his life. Let's assume actuarial tables state that John should live until age 75. Theoretically, then, he should receive $200,000 ($20,000 per year multiplied by ten years). Of course, John won't retire for another 23 years. Assuming a 4% inflation rate, the present value of the $200,000 retirement is only $67,000. Sue Smith is therefore surprised to learn that her 41.5% share in the plan is only worth $27,805. If she waits until John retires, she will be eligible to receive a much larger sum. Such is the nature of present value calculations.
Present value calculations can be done using present value tables, but with the internet at your fingertips, why bother? Many reputable websites offer free present value calculators that are quite simple to use (www. investopedia. com is one example).
The mechanics of retirement plan division . Dividing different types of plans requires different types of orders. Retirement plans that are controlled by federal law (which preempts state law) must be divided by an order known as a Qualified Domestic Relations Order (a" QDRO" - pronounced "quadro"). Other plans can be divided by a state court order alone. A QDRO is an extremely important document, and it must be perfectly accurate, simply because anything omitted from the order can't be reinstated later. Virtually all mediators, and most family lawyers, rely on specialists to draft QDROs.
The following table sets forth a few of the common types of plans and the type of order required.
Type of Order Required to Divide Plan
Subject to very specific government regulations regarding division upon divorce
Income tax considerations . The IRS always gets it share. True, some retirement plans have very real tax advantages, but you're fooling yourself if you don't think the IRS takes a bite of the money you accrue for retirement at some point.
A common trade-off divorcing couples agree to involves allowing one spouse to take the retirement plan, while the other retains the equity in the family home. If you are the spouse taking the retirement plan, you need to understand how the proceeds of the plan will be taxed to determine if it is a fair trade. Ideally, the retirement plan was funded with after-tax dollars, which means that you will be able to withdraw part of the proceeds at retirement without being taxed.
By either contacting the retirement plan administrator or checking your annual benefits statement, you ought to be able to determine the ratio of pre-tax to after-tax contributions. As a general rule, if your employer partly funded a retirement plan (i. e. with matching contributions to a 401(k) account, for instance) the portion that the employer contributed will be taxed when withdrawn at retirement.
Keep in mind that you do not pay taxes on money that you contribute to a traditional IRA. However, a Roth IRA works very differently. You are taxed on the money you contribute to a Roth IRA, but you receive the benefits tax free upon retirement. This clearly makes receiving a Roth IRA a more attractive proposition upon divorce.
Determining the true value of a retirement plan: The date of separation is critically important when valuing a retirement plan. As is the case with the income of either spouse, any increase in the value of the plan after the date of separation is the separate property of the beneficiary spouse. Contrast this with the way in which assets are valued - at the date of trial. This may lead to confusion, even among financial professionals. Consider the following example:
John and Sue Smith decide to divorce in 2008. John moves out of the house and rents an apartment. Neither holds out any hope of reconciliation. However, John and Sue aren't in any great hurry to get divorced, and they don't complete the process until 2012. All of the appreciation in John's retirement between 2008 and 2012 is considered his separate property. Sue is therefore only entitled to half of the value of his retirement plan as valued from the date of their marriage to the date of separation.
Calculating the true value of a retirement plan is an important part of the asset division process. It can seem daunting at first, and some people choose to have a third party (such as an accountant) value a retirement plan.
Division of Debt
Unfortunately for many married couples, dividing debt is just as important as dividing assets. If you choose to mediate your divorce, you may divide your debt in the manner that works best for you both. If your divorce goes to trial, you won't have this luxury. The following information explores how a court might order the division of debt pursuant to a litigated divorce -- information that may help you negotiate an agreement with your spouse.
First, remember that any debt incurred during marriage and prior to separation is community property, regardless of who incurred it . This means that if your spouse secretly racked up massive credit card debt while you were married, you are out of luck. However, this is a glimmer of hope, and that involves the nature of the debt. If the debt was incurred to benefit the "community," i. e. the two of you, it is considered community property. However, if the debt was incurred solely for the benefit of one spouse, relief may be available. Consider the following example:
John and Sue Smith lived modestly. They made timely payments on their mortgage, took one inexpensive family vacation per year, and rarely ate at nice restaurants. John completely managed the family finances, from balancing the checkbook to paying credit card bills. Unbeknownst to Sue, while they were living in the same house (and separation wasn't yet being discussed), John was incurring huge credit card bills on hotel rooms and lavish meals in an attempt to impress his young lover. Sue is greatly relieved to learn that the debt associated with John's seduction of his lover is his separate property.
Note, however, that Sue's relief may be short lived. While a court can certainly divide debt and order that one spouse is solely responsible for a particular debt, credit card companies are not hindered by these orders if the credit card was a joint card. Creditors may still collect from either spouse. The only remedy for the aggrieved spouse is to go after the spouse who incurred the debt for reimbursement.
Use of community property to pay pre-marital debt . Sometimes one spouse enters a marriage with debt. If community property funds are used to pay down that separate property debt, the community is entitled to a reimbursement for the amount it paid. Consider the following example:
Sue Smith had large credit card debts she incurred prior to marrying John. To improve their credit rating so they could buy a house, Sue and John worked hard to pay off the debt. Now that they are debt free, Sue files for divorce. Because Sue and John used community property earnings to pay off Sue's separate property debt, the community is entitled to reimbursement for the amount paid. In other words, John should ultimately recover half of the amount used to pay off Sue's debt, as half of all community property is his.
Use of separate property to pay community property debt . In California, if one spouse's separate property is used to pay off a community property debt, a court will presume that a gift was made to the community. However, there is an important exception to this rule. When one spouse uses his or her separate property to acquire community property, he or she has a statutory "tracing right" of reimbursement. Such contributions include payments of principle (i. e. a down payment on a house), payments made to improve community property (i. e. an addition to a home), and payments that reduce the principal of a loan used to purchase or improve community property. Note that this does not include payments for maintenance of the property, interest on the underlying loan, or taxation. Consider the following examples:
Sue and John Smith decide to send their child, Bobby, to private school. John uses funds from his separate property brokerage account to pay the tuition. He is not entitled to reimbursement from the community for this payment.
Sue and John Smith want to purchase a home. John has significant savings that he accumulated prior to marriage. He uses these savings to make the down payment on their new home. John is entitled to "trace" this contribution to his separate property, meaning he has the right to reimbursement from the community for the amount of the down payment.
Sue and John Smith decide their home is too small, and John uses savings that he accumulated prior to marriage to "improve" the property by adding an extra room. John is entitled to trace this contribution to his separate property, and he is entitled to reimbursement from the community.
Sue and John Smith are struggling to pay all of the expenses associated with living in their home. As a result, John agrees to pay for the maintenance of the home and all associated property taxes using his separate property savings. Unfortunately for John, he is not entitled to reimbursement from the community for any of this amount. Had John used his separate property to make principal payments on the mortgage, he could trace his contribution and qualify for reimbursement. However, because John used his funds to pay taxes and maintenance costs associated with the home, he is out of luck.
Use of separate property to pay community property debt after separation: Once a couple has separated, a spouse who uses separate property to pay pre-existing community debt is entitled to reimbursement from the community. This reverses the presumption of a gift that exists when separate property is used to pay a community debt before separation. Note, however, that there are a few exceptions to this rule. The first is that the paying spouse is not entitled to reimbursement when the amount paid is not substantially in excess of the value of the use. This may sound like a mouthful, but all it means is that a spouse who enjoys the use of the property should not be reimbursed for paying down debt associated with that property, so long as the value of the use is roughly equal to the amount paid. Consider the following example:
John and Sue Smith separate, and John continues to make loan payments on his pickup truck. Sue never drives the truck. In other words, John is the only one who enjoys the benefit of the truck. As a result, the payments John makes on his pickup truck can be correlated to his use of the truck. He is therefore not entitled to reimbursement from the community for the loan payments, even if the truck is held jointly.
There are two additional exceptions to the rule that a spouse is entitled to reimbursement for amounts paid to pay off a community debt after separation: (1) where the parties have agreed that the payments will not be reimbursed, and (2) where the payments were intended as a gift or as child support or spousal support.
Use of community property funds to pay separate living expenses after separation . The community is only entitled to reimbursement when one spouse uses community property funds to pay his or her separate living expenses to the extent that those expenses exceed a "reasonable" amount of child support and spousal support. Of course, as is the case in so many areas of the law, understanding the meaning of the term "reasonable" is important. While the term will vary from case to case, a reasonable amount would probably be the amount of guideline support that a court would order in an application for temporary child and spousal support. Consider the following example:
After separating from John Smith, Sue remains in the family home and continues to care for their son, Bobby. Sue's part-time work brings home only $1,500 a month, and as a result, a court would likely order that John pay her $3,000 per month in temporary child support and spousal support. However, Sue is waist-deep in a midlife crisis, and she soon finds herself spending $7,000 a month to support her new lifestyle. She sells $5,500 worth of stock from the Smith's community property stock portfolio each month for five months to make ends meet. Here, Sue spent $5,500 in community property funds for five months, when guideline support would have totaled $3,000 per month. As a result, a judge might order that Sue reimburse the community for the difference between guideline support and the amount of community property she liquidated (i. e. $12,500, which represents $2,500 per month for each of the five months that she sold stock).
One spouse remains in primary residence while other spouse makes mortgage payments . Quite often one spouse moves out of the family home during separation while the other spouse remains in the home. The spouse who leaves may offer to keep paying the mortgage and property taxes. Unless these payments are in made in accordance with an agreement to waive reimbursement or the payments are a form of child or spousal support, the paying spouse may be entitled to reimbursement because he or she is paying a community debt with separate property funds.
Lastly, the spouse who stays in the home could be in trouble in a contested divorce if the fair market rental value of the home exceeds the mortgage payments. If a home was recently purchased, the mortgage payments will almost always exceed the fair market rental value of a home. However, this often isn't true with older properties. A home bought twenty years ago may be encumbered by a fairly modest mortgage. However, in the intervening twenty years, the fair market rental value of the home may have increased dramatically. The spouse remaining in the home after separation may therefore be required to reimburse the community for the difference between the mortgage payments and the fair market rental value of the home between the date of separation and the date of trial. Consider the following example:
John and Sue Smith decide to separate, and they both agree that Sue should stay in the home with their son, Bobby. John continues to pay the mortgage using his income from his job. The Smith's bought their home 20 years ago, and as a result, their mortgage payments are a modest $1,500 per month. However, the fair market rental value of their home is $2,500. The Smiths separate 10 months before their divorce is final. As a result, Sue may owe the community $10,000 ($2,500 - $1,500 multiplied by 10). And it doesn't stop there. The community may also be entitled to reimbursement for the mortgage payments themselves (another $15,000). In the end, Sue will be dismayed to know that she owes a total of $25,000 to the community simply because she was allowed to remain in the home during separation. The net cost to Sue is $12,500 (because half of the community is hers, after all), and the net benefit to John is $12,500 (because half of the community is his).
The lesson here? If you are the spouse remaining in the home during separation, make absolutely sure that you document in writing that the privilege of remaining in the house should be considered an element of spousal support (or child support, if applicable) and that the paying spouse should not receive any reimbursement as a result.
These 10 Companies Are Generous with Stock Options
With stock awards and options, equity compensation programs can serve as additional ways to pay workers beyond wages or salaries. They supplement base pay to provide competitive compensation, can act as a recognition tool to award employees for satisfactory work, and they help ensure that employees’ interests are aligned with shareholders. These 10 employers from Fortune ‘s 100 Best Companies to Work For list understand the importance of those three objectives and offer their employees ample equity programs. Here’s a look at what the best employers in the U. S. are doing to retain their highest-performing employees.
1. Genentech 100 Best Companies rank: 11 At Genentech all exempt employees and hourly workers who put in at least 20 hours per week are eligible for the company’s Long Term Incentive program and receive the grants as part of their overall compensation package. About two-thirds of an employee’s annual award is received in stock-settled stock appreciation rights and the remaining third in restricted stock units (RSUs). In 2014, over 97% of the company’s employees received long-term incentive benefits, which are awarded based on their performance. In addition to the equity programs themselves, Genentech also offers financial counseling sessions to ensure that workers understand their benefits and take advantage of them.
2. GoDaddy 100 Best Companies rank: 95 GoDaddy gddy . which was founded just under 20 years ago, made it back onto Fortune ’s 100 Best Companies list this year for the second time. When it went public in April of last year, GoDaddy offered its employees non-qualified stock options. The initial six-month lock up period following its IPO ended this past October, at which point they were allowed to begin trading their shares, though a majority chose to hold onto them. The technology provider also offers a stock purchase plan that offers employees the opportunity to buy and sell stock every six months at a discounted rate of 15%.
3. Stryker 100 Best Companies rank: 21 This Michigan-based medical technology company provides employees with investment opportunities, offering stock options and restricted stock units as a way to “attract, motivate, and retain the most talented people.” These grants generally begin to vest after a period of one year. Stryker syk . which had a global revenue of over $9 billion last year, also offers an employee stock purchase plan which, similar to other companies on the list, lets employees purchase shares at a discounted price. That option could become even more appealing if its recent acquisition of Physio-Control International proves to be a good investment.
4. The Cheesecake Factory 100 Best Companies rank: 98 The Cheesecake Factory cake tells Fortune that it was the first restaurant company to allow management team members to become shareholders, and it remains one of the few. The upscale casual chain restaurant was founded in 1978 and employs upwards of 35,000 people. It uses stock awards in the form of stock options and RSUs as a retention tool for general managers and executive kitchen managers. These options vest over a period of five years, and vesting becoming more desirable with each subsequent grant. The retention strategy appears to be working as 94% of employees say that the company offers great rewards and 97% say they’re proud to work there.
5. Aflac 100 Best Companies rank: 50 Though Aflac afl keeps the details of its equity programs private, we do know that the company provides stock options and other incentives to demonstrate its appreciation for its employees and ensure that they have a vested interest in the company’s work. Though Aflac may be best known for its amusing duck mascot, the supplemental health and life insurance provider is a giant in its industry. It reported over $22 billion in worldwide revenue last year and its CEO, Daniel Amos, has been heading the company for over a quarter of a century .
6. Cadence 100 Best Companies rank: 52 A large majority of the Cadence’s cdns employees are currently shareholders. Though stock options are offered exclusively to members of the executive team, 44% of employees were granted restricted stock units last year. That includes the majority of new hires who received stock compensation as well as seasoned, high performing employees. Cadence also offers an employee stock purchase program that not only gives workers a 15% discount, but also offers a 6-month look-back. Since current president and CEO Lip-Bu Tan took over in 2009, the electronic company’s stock has gone up by 400%.
7. Intuit 100 Best Companies rank: 34 Every Intuit intu employee is eligible for some kind of equity grant, whether it be stock option or restricted stock units. Those in vice president positions or higher receive non-qualified stock options upon being hired, while those in lower positions are offered RSUs. Either way, the equity grant vests over a period of three years. The information technology company also offers an employee stock purchase plan. Workers have the option to contribute between up to 15% of their eligible pay to purchase stock at a discount of at least 15%, and option that more than two-thirds of employees choose to take advantage of.
8. Nordstrom 100 Best Companies rank: 92 Fashion specialty retailer Nordstrom jwn was founded in 1901, employs nearly 70,000 people worldwide, and has 333 U. S. locations—soon to be 334 as it gears up to open a second Manhattan department store. The company offers stock options as part of its Total Rewards program. Eligible leaders are granted stock awards each year, which are generally split evenly between non-qualified stock options and RSUs. While stock awards are granted to only the highest performing salespeople, other Nordstrom workers can take part in the company’s employee stock purchase plan.
9. Whole Foods Market 100 Best Companies rank: 75 Every employee at Whole Foods Market wfm is eligible for stock option grants after working their first 6,000 hours, which works out to about three years of full-time employment. A worker’s level of employment determines which options he or she is eligible for. Team members receive service hour stock options, employees in certain leadership positions receive leadership stock, and board members and executive officers receive RSUs. The organic food retailer tells Fortune that, since its 1992 inception, about 94% of its equity awards have been granted to team members rather than C-Suite employees.
10. FactSet Research Systems 100 Best Companies rank: 89 The financial services company based in Norwalk, Conn. has an employee stock purchase plan that provides its workers with a 15% discount. FactSet fds offers the option on a quarterly basis, at which point employees can invest between 1% and 10% of their after-tax base pay. Though there are certain restrictions, such as annual limits and holding periods, employees can join the plan on their very first day, and over half of U. S. employees choose to participate. The company also offers an equity awards program with regular stock options, performance-based stock options, and RSUs. Every year between 20% and 25% of U. S. employees receive an equity grant, either as part of their compensation package or as performance recognition.
See the full list of Fortune’s 100 Best Companies to Work For at fortune. com/bestcompanies. where you can also find job searching tips, career advice, and secrets from recruiters on how to get hired.
E 16-11 - stock options, exercise of the stock options, and.
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E16-11 (Issuance, Exercise, and Termination of Stock Options) On January 1, 2010, Magilla Inc. granted stock options to officers and key employees for the purchase of 20,000 shares of the company’s$10 par common stock at $25 per share. The options were exercisable within a 5-year period beginning January 1, 2012, by grantees still in the employ of the company, and expiring December 31, 2016. The service period for this award is 2 years. Assume that the fair value option-pricing model determines total compensation expense to be $400,000. On April 1, 2011, 3,000 options were terminated when the employees resigned from the company. The market value of the common stock was $35 per share on this date. On March 31, 2012, 12,000 options were exercised when the market value of the common stock was $40 per share. Instructions (a) Prepare journal entries to record issuance of the stock options, termination of the
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Unformatted text preview: stock options, exercise of the stock options, and charges to compensation expense, for the years ended December 31, 2010, 2011, and 2012. (b) Prepare the 12/31/16 entry assuming the remaining options were not exercised. Why would options not be exercised? Solution: 1/1/10 No entry required (Total compensation cost is $400,000) 12/31/10 Compensation expense-----------200,000 Paid-in-capital-Stock options-------200,000 ($400,000*1/2) 4/1/11 Paid-in-capital-Stock options----300,000 Compensation expense-------------300,000 ($200,000*3000/20,000) 12/31/11 Compensation expense-----------170,000 Paid-in-capital-Stock options-------170,000 ($400,000*1/2*17/20) 3/31/12 Cash (12,000*25) --------------------300,000 Paid-in-capital-Stock options-------240,000 ($400,000*12000/20,000) Common stock----------------------------120,000 Paid in capital excess of par------------420,000. View Full Document
What is Implied Volatility?
Volatilidad implícita (IV) es uno de los conceptos más importantes para los operadores de opciones de entender por dos razones. En primer lugar, muestra lo volátil que podría ser el mercado en el futuro. En segundo lugar, la volatilidad implícita puede ayudarle a calcular la probabilidad. Este es un componente crítico del comercio de opciones que puede ser útil al tratar de determinar la probabilidad de que una acción alcance un precio específico en un cierto tiempo. Keep in mind that while these reasons may assist you when making trading decisions, implied volatility does not provide a forecast with respect to market direction. Although implied volatility is viewed as an important piece of information, above all it is determined by using an option pricing model, which makes the data theoretical in nature. There is no guarantee these forecasts will be correct.
Understanding IV means you can enter an options trade knowing the market’s opinion each time. Too many traders incorrectly try to use IV to find bargains or over-inflated values, assuming IV is too high or too low. This interpretation overlooks an important point, however. Options trade at certain levels of implied volatility because of current market activity. In other words, market activity can help explain why an option is priced in a certain manner. Here we'll show you how to use implied volatility to improve your trading. Specifically, we’ll define implied volatility, explain its relationship to probability, and demonstrate how it measures the odds of a successful trade.
Historical vs. implied volatility
There are many different types of volatility, but options traders tend to focus on historical and implied volatilities. Historical volatility is the annualized standard deviation of past stock price movements. It measures the daily price changes in the stock over the past year.
In contrast, IV is derived from an option’s price and shows what the market “implies” about the stock’s volatility in the future. Implied volatility is one of six inputs used in an options pricing model, but it’s the only one that is not directly observable in the market itself. IV can only be determined by knowing the other five variables and solving for it using a model. Implied volatility acts as a critical surrogate for option value - the higher the IV, the higher the option premium.
Since most option trading volume usually occurs in at-the-money (ATM) options, these are the contracts generally used to calculate IV. Once we know the price of the ATM options, we can use an options pricing model and a little algebra to solve for the implied volatility.
Some question this method, debating whether the chicken or the egg comes first. However, when you understand the way the most heavily traded options (the ATM strikes) tend to be priced, you can readily see the validity of this approach. If the options are liquid then the model does not usually determine the prices of the ATM options; instead, supply and demand become the driving forces. Many times market makers will stop using a model because its values cannot keep up with the changes in these forces fast enough. When asked, “What is your market for this option?” the market maker may reply “What are you willing to pay?” This means all the transactions in these heavily traded options are what is setting the option’s price. Starting from this real-world pricing action, then, we can derive the implied volatility using an options pricing model. Hence it is not the market markers setting the price or implied volatility; it’s actual order flow.
Implied volatility as a trading tool
Implied volatility shows the market’s opinion of the stock’s potential moves, but it doesn’t forecast direction. If the implied volatility is high, the market thinks the stock has potential for large price swings in either direction, just as low IV implies the stock will not move as much by option expiration.
To option traders, implied volatility is more important than historical volatility because IV factors in all market expectations. If, for example, the company plans to announce earnings or expects a major court ruling, these events will affect the implied volatility of options that expire that same month. Implied volatility helps you gauge how much of an impact news may have on the underlying stock.
How can option traders use IV to make more informed trading decisions? Implied volatility offers an objective way to test forecasts and identify entry and exit points. With an option’s IV, you can calculate an expected range - the high and low of the stock by expiration. Implied volatility tells you whether the market agrees with your outlook, which helps you measure a trade’s risk and potential reward.
Defining standard deviation
First, let’s define standard deviation and how it relates to implied volatility. Then we’ll discuss how standard deviation can help set future expectations of a stock’s potential high and low prices - values that can help you make more informed trading decisions.
To understand how implied volatility can be useful, you first have to understand the biggest assumption made by people who build pricing models: the statistical distribution of prices. There are two main types which are used, normal distribution or lognormal distribution. The image below is of normal distribution, sometimes known as the bell-curve due to its appearance. Plainly stated, normal distribution gives equal chance of prices occurring either above or below the mean (which is shown here as $50). We are going to use normal distribution for simplicity’s sake. However, it is more common for market participants to use the lognormal variety.
Why, you ask? If we consider a stock at a price of $50, you could argue there is equal chance that the stock may increase or decrease in the future. However, the stock can only decrease to zero, whereas it can increase far above $100. Statistically speaking, then, there are more possible outcomes to the upside than the downside. Most standard investment vehicles work this way, which is why market participants tend to use lognormal distributions within their pricing models.
With that in mind, let’s get back to the bell-shaped curve (see Figure 1). A normal distribution of data means most numbers in a data set are close to the average, or mean value, and relatively few examples are at either extreme. In layman’s terms, stocks trade near the current price and rarely make an extreme move.
Let’s assume a stock trades at $50 with an implied volatility of 20% for the at-the-money (ATM) options. Statistically, IV is a proxy for standard deviation. If we assume a normal distribution of prices, we can calculate a one standard-deviation move for a stock by multiplying the stock’s price by the implied volatility of the at-the-money options:
One standard deviation move = $50 x 20% = $10
The first standard deviation is $10 above and below the stock’s current price, which means its normal expected range is between $40 and $60. Standard statistical formulas imply the stock will stay within this range 68% of the time (see Figure 1).
All volatilities are quoted on an annualized basis (unless stated otherwise), which means the market thinks the stock would most likely neither be below $40 or above $60 at the end of one year. Statistics also tell us the stock would remain between $30 and $70 - two standard deviations – 95% of the time. Furthermore it would trade between $20 and $80 - three standard deviations - 99% of the time. Another way to state this is there is a 5% chance that the stock price would be outside of the ranges for the second standard deviation and only a 1% chance of the same for the third standard deviation.
Keep in mind these numbers all pertain to a theoretical world. In actuality, there are occasions where a stock moves outside of the ranges set by the third standard deviation, and they may seem to happen more often than you would think. Does this mean standard deviation is not a valid tool to use while trading? Not necessarily. As with any model, if garbage goes in, garbage comes out. If you use incorrect implied volatility in your calculation, the results could appear as if a move beyond a third standard deviation is common, when statistics tell us it’s usually not. With that disclaimer aside, knowing the potential move of a stock which is implied by the option’s price is an important piece of information for all option traders.
Standard deviation for specific time periods
Since we don’t always trade one-year options contracts, we must break down the first standard deviation range so that it can fit our desired time period (e. g. days left until expiration). The formula is:
(Note: it’s usually considered more accurate to use the number of trading days until expiration instead of calendar days. Therefore remember to use 252 - the total number of trading days in a year. As a short cut, many traders will use 16, since it is a whole number when solving for the square root of 256.)
Let’s assume we are dealing with a 30 calendar-day option contract. The first standard deviation would be calculated as:
A result of ± 1.43 means the stock is expected to finish between $48.57 and $51.43 after 30 days (50 ± 1.43). Figure 2 displays the results for 30, 60 and 90 calendar-day periods. The longer the time period, the increased potential for wider stock price swings. Remember implied volatility of 10% will be annualized, so you must always calculate the IV for the desired time period.
Does crunching numbers make you nervous? No worries, TradeKing has a web-based Probability Calculator that will do the math for you, and it’s more accurate than the quick and simple math used here. Now let’s apply these basic concepts to two examples using fictitious stock XYZ.
A stock’s “probable” trading range
Everyone wishes they knew where their stock may trade in the near future. No trader knows with certainty if a stock is going up or down. While we cannot determine direction, we can estimate a stock’s trading range over a certain period of time with some measure of accuracy. The following example, using TradeKing’s Probability Calculator, takes options prices and their IVs to calculate standard deviation between now and expiration, 31 days away. (see Figure 3)
This tool uses five of the six inputs of an options pricing model (stock price, days until expiration, implied volatility, risk-free interest rate, and dividends). Once you enter the stock symbol and the expiration (31 days), the calculator inserts the current stock price ($104.91), the at-the-money implied volatility (24.38%), the risk-free interest rate (.3163%), and the dividend (55 cents paid quarterly).
Let’s start with the bottom of the screenshot above. The different standard deviations are displayed here using a lognormal distribution (first, second and third moves). There is a 68% chance XYZ will between $97.49 and $112.38, a 95% chance it will be between $90.81 and $120.66, and a 99% chance it will be between $84.58 and $129.54 on the expiration date.
XYZ’s first standard deviation limits can then be inputted at the top right of the calculator as the First and Second Target Prices. After you hit the Calculate button, the Probability of Touching will display for each price. These statistics show the odds of the stock hitting (or touching) the targets at any point before expiration. You’ll notice the Probabilities at the Future Date are also given. These are the chances of XYZ finishing above, between, or below the targets on the future date expiration).
As you can see, the probabilities displayed show XYZ is more likely to finish between $97.49 and $112.38(68.28%) than above the highest target price of $112.38 (15.87%) or below the lowest target price of $97.49 (15.85%). There is a slightly better chance (.02%) of reaching the upside target, because this model uses a lognormal distribution as opposed to the basic normal distribution found in Figure 1.
When examining the probability of touching, you’ll notice XYZ has a 33.32% chance of climbing to $112.38 and a 30.21% chance of falling to $97.49. The probability of it touching the target points is about double the probability of it finishing outside this range at the future date.
Using TradeKing’s Probability Calculator to help analyze a trade
Let’s put these theories into action and analyze a short call spread. This is a two-legged trade where one leg is bought (long) and one leg is sold (short) simultaneously. Bear in mind, because this is a multiple-leg option strategy it involves additional risks, multiple commissions, and may result in complex tax treatments. Be sure to consult with a tax professional before entering this position.
When using out-of-the-money (OTM) strikes, the short call spread has a neutral to bearish outlook, because this strategy profits if the market trades sideways or drops. To create this spread, sell an OTM call (lower strike) and buy a further OTM call (higher strike) in the same expiration month. Using our earlier example, with XYZ trading at $104.91, a short call spread might be constructed as follows:
Sell one XYZ 31-day 110 Call at $1.50 Buy one XYZ 31-day 115 Call at $0.40 Total credit = $1.10
Another name for this strategy is the call credit spread, since the call you’re selling (the short option) has a higher premium than the call you’re buying (the long option). The credit is the maximum profit for this spread ($1.10). The maximum loss or risk is limited to the difference between the strikes less the credit (115 – 110 – $1.10 = $3.90).
The spread’s break-even point at expiration (31 days) is $111.10 (the lower strike plus the credit: 110 + $1.10). Your goal is to keep as much of the credit as possible. In order for that to happen, the stock must be below the lower strike at expiration. As you can see, the success of this trade largely boils down to how well you choose your strike prices. To help analyze the above strikes, let’s use TradeKing’s Probability Calculator. No guarantees are given by using this tool, but the data it provides may be helpful.
In Figure 4, all the inputs are the same as before, with the exception of the target prices. The spread’s break-even point ($111.10) is the first target price (upper right). Its largest loss ($3.90) occurs if XYZ finishes at expiration above the upper strike ($115) by expiration - the second target price.
Based on an implied volatility of 24.38%, the Probabilities at the Future Date indicate the spread has an 80.10% chance of finishing below the lowest target price (111.10). This is our goal in order to retain at least one cent of the $1.10 credit. The odds of XYZ finishing between the break-even point and the higher strike (111.10 and 115) is 10.81%, while the probability of XYZ finishing at 115 (or above) – the point of the spread’s maximum loss – is 9.09%. To summarize, the chances of having a one-cent profit or more are 80.10% and the odds of having a one-cent loss or more are 19.90% (10.81% + 9.90%).
Although the spread’s probability of a gain at expiration is 80.10%, there is still a 41.59% chance XYZ will touch its break-even point ($111.10) sometime before 31 days have passed. This means based on what the marketplace is implying the volatility will be in the future, the short call spread has a relatively high probability of success (80.10%). However, it’s also likely (41.59% chance) this trade will be a loser (trading at a loss to the account) at some point in the next 31 days.
Many credit spread traders exit when the break-even point is hit. But this example shows patience may pay off if you construct spreads with similar probabilities. Don’t take this as a recommendation on how to trade short spreads, but hopefully it’s an instructive take on the probabilities that you may never have calculated before.
In conclusion…
Hopefully by now you have a better feel for how useful implied volatility can be in your options trading. Not only does IV give you a sense for how volatile the market may be in the future, it can also help you determine the likelihood of a stock reaching a specific price by a certain time. That can be crucial information when you’re choosing specific options contracts to trade.
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Tech stocks that would have been an awesome investment 10 years ago
An investment in Apple stock 10 years ago would be worth 47 times as much today. An investment in Amazon would have given you 14 times your money back. Not a bad way to spend some dollars in 2002.
Those are far from the only stocks that would have given huge returns over a 10-year time span, though. Other notable mentions include Akamai and Red Hat . both returning more than 10 times the money over the past 10 years.
We were curious how much the stock value of various tech companies had increased over the past 10 years, so courtesy of some digging in Google Finance we took 32 well-known tech companies that are traded on Nasdaq and NYSE, and noted how much their stock value has changed over time.
Larger version available .
It’s worth noting that since this analysis is based on two snapshots of the stock market, one now and one 10 years ago, it hides the fact that many of these stocks have had a number of ups and downs during that time period.
Observaciones
26 out of these 32 companies . 81%, are worth more today than 10 years ago.
19 out of 32 . almost 60%, have more than doubled the investment over 10 years (i. e. a return of 100% or more).
23 out of 32 . almost 72%, beat the Dow Jones Industrial Average.
Average gain with Apple included: 409%
Average gain without Apple included: 275%
We included Google even though the stock has only been around for 8 years. Same thing with Salesforce. com . Trivia: An initial investment in Salesforce. com would today be worth 66% more than the same money put into Google.
Yahoo may be in trouble, but a 10-year investment would still have been worth 1.8 times as much today.
RIM ’s stock, although its value has dropped quite a bit in later years, is still worth 3.9 times as much today as it was 10 years ago.
Good old IBM has actually done ok. An investment would be worth 2.4 times as much today.
And what about Microsoft . Turns out it has not performed very strongly. Investing in Microsoft 10 years ago, you would now have 1.1 times the money.
Comparing the polar opposites: Apple and Nokia
The data we collected paints a clear picture. When looking at long-term value change, i. e. over the past 10 years, Apple and Nokia are polar opposites.
Case in point: If you had invested the same amount of money in the two companies 10 years ago, the Apple investment would today be worth 243 times as much as the Nokia investment.
Some of this massive difference can no doubt be attributed to the rise of the iPhone and Nokia’s failure to capture as much of the smartphone market as it should have. Remember, Nokia was doing smartphones well before Apple came into the picture, they just failed to adapt to the massive paradigm change that came with the iPhone, and later, Android.
Ultimas palabras
It’s always easy to look back at the past with 20/20 hindsight, but that doesn’t stop a ton of people wishing they had invested some of their hard-earned money in companies like these a few years ago.
Think about it, if you had put just $5,000 into Apple stock in 2002, you could have sold it today for around $234,000 . Ka-ching!
The challenge now is to figure out which companies will see the biggest returns over the coming 10 years.
Disclaimer: We’re techies, not financial analysts. Keep that in mind if you decide to do any investing based on this article.
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Tax Implications of Stock Options
Tax Implications of Stock Options. The primary determinant of tax implications on stock options is the type of option that is granted by the employer. Employers usually provide regular non-statutory options but may grant Incentive Stock Options (ISOs), which have special tax characteristics. The option type affects an employee’s judgment about timing for selling acquired stock. The transaction may be taxable as ordinary compensation income or capital gain income. There are also two distinct tax systems to consider.
Taxed as Compensation
Regular stock options incur income tax upon exercise. The taxable amount is the “bargain element”—the difference between the price paid to exercise the option and the market value of the stock acquired. If the options are ISOs, the bargain element is not added to taxable income upon exercise. If stock obtained from exercising ISOs is sold less than one year after exercise or less than two years after the option grant, the bargain element is taxed as income in the year of stock sale.
Capital Gain Tax
Stock sold one year or less after the exercise date is a short-term capital gain. Stock sold more than one year after the exercise date is a long-term capital gain. The tax rate for long-term capital gain is lower. The tax rate on short-term capital gain is the same as compensation income. However, there is a limit on the amount of any capital loss in a single year that may be applied to reducing compensation income. When the bargain element is taxed as compensation, the tax assessment might exceed the maximum single-year tax savings on a capital loss. Capital gain tax is assessed on the difference between the sale proceeds and the cost basis. For regular stock options, the cost basis includes the bargain element taxed as compensation in the exercise year. For ISOs, the bargain element is added to basis and taxed as compensation in the year of stock sale unless the shares are sold more than one year after the exercise date and more then two years after the ISO grant date. If both qualifications are met, the bargain element is not added to basis. The capital gain is the difference between sale proceeds and the option exercise price.
AMT
When ISOs are exercised, the bargain element is added to income in the exercise year using the Alternative Minimum Tax (AMT) method. The bargain element upon exercise of the ISOs may be sufficiently high enough that the employee will become subject to tax under the AMT calculation. If the employee is already subject to tax under AMT, the tax is increased by exercise of the ISOs. When stock acquired from exercise of ISOs is sold in the calendar year after exercise, the employee makes another AMT adjustment. Under AMT, the acquired stock has a different cost basis than under the regular income tax system. This causes a different capital gain calculation under AMT.
Referencias
ACCT Problems
(Equity Securities Entries)
Capriati Corporation made the following cash purchases of securities during 2012, which is the first year in which Arantxa invested in securities.
1. On January 15, purchased 11,700 shares of Gonzalez Company's common stock at $43.55 per share plus commission $2,574.
2. On April 1, purchased 6,500 shares of Belmont Co.'s common stock at $67.60 per share plus commission $4,381.
3. On September 10, purchased 9,100 shares of Thep Co.'s preferred stock at $34.45 per share plus commission $6,383.
On May 20, 2012, Capriati sold 3,900 shares of Gonzalez Company's common stock at a market price of $45.50 per share less brokerage commissions, taxes, and fees of $3,705. The year-end fair values per share were: Gonzalez $39.00, Belmont $71.50, and Thep $36.40. In addition, the chief accountant of Capriati told you that Capriati Corporation plans to hold these securities for the long term but may sell them in order to earn profits from appreciation in prices.
Prepare the journal entries to record the above three security purchases.
Articles > Investing > Maximize Your Employee Stock Purchase Plan (ESPP)
Maximize Your Employee Stock Purchase Plan (ESPP)
If your company offers employee stock purchase plans (ESPP), it is important to understand how they work and how to maximize your returns and minimize your tax liability. ESPPs are discounted shares of stocks offered to company employees through automatic investment.
Once you enroll in an ESPP, you must first state what percentage of your paycheck you wish to contribute towards the stock purchase. No stock is purchased at this point, only cash set aside guaranteed for stock purchase at the end of the period. The maximum contribution is usually 10%. At the end of the period, as defined in your ESPP, the accumulated cash is automatically used to purchase company stock at a discount.
Discounts and accumulation periods differ by company. If you plan to maximize your gains, you should contribute the maximum amount allowed.
For example, if shares of your company are publicly traded at $10 per share (exercise price), and your ESPP offers a 15% discount, you will purchase them at $8.50 (grant price). If you decide to sell these shares immediately, as most employees do, then you have a guaranteed profit of 15%. This gain, however, will be taxed regular income, which is considerably higher than a long-term capital gain tax for stockholders who hold for over a year.
In reality, your profit will be closer to 10% after taxes. Capital gains percentages are calculated based on your yearly income.
Suppose that you also have stock options and other stock in the company, and you feel that you are over-invested in the company. In fact, your entire portfolio may consist of your employer’s stock. In this case, it is best to sell right away and use the gains to purchase other investments in the open market. Another popular strategy is to sell right away, then take part of the proceeds of the sale to purchase company stock on the open market, while saving or investing the rest. You can use this option if the company’s stock unbalances your portfolio.
However, you don’t have to sell right away. If you know that your company has a hugely profitable product coming out, you can hold on to the stock and let it rise even more. However, employees who don’t have investing experience are often intimidated by this option and opt for the same day sale with a guaranteed profit. Holding the stock can increase your profits as well as minimize taxes if you hold for over a year. If your company is clearing doing poorly, then it is best to sell right away. Note that if you are high-level executive, the SEC may classify you as an insider, and your ability to trade shares granted by ESPPs may be handicapped.
If you decide to hold your shares, you can activate trailing stops at your brokerage to guarantee that you don’t incur a loss.
For example, you now hold shares of your company with a purchase price of $8.50 which you can sell for $10 immediately. You can set a trailing stop at 15%, which guarantees that if the stock falls 15% at any given time, the stock will be sold immediately. This sell price will initially be set at $8.50, so in a worse-case scenario, you simply lose the bonus granted from the discounted shares and stop short of a loss. If the value of the stock rises to $15, the trailing stop will rise with it to $12.75. If the stock then falls to $12.75, it will be sold immediately. Trailing stops can be a powerful tool to protect your principal investment and guarantee gains, and if the share price stays above its stop price for over a year, you will also be eligible for lower tax rates.
Keep these considerations in mind when you enroll in ESPPs. Being well aware of your company's financial health and utilizing these strategies will allow you to maximize your profits and minimize your taxes.
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CITE THIS TERM
Term Sheet – Vesting
When Jason and I last wrote on the mythical term sheet, we were working our way through the terms that “can matter.” The last one on our list is vesting, and we approach it with one eyebrow raised understanding the impact of this term is crucial for all founders of an early stage company.
While vesting is a simple concept, it can have profound and unexpected implications. Typically, stock and options will vest over four years – which means that you have to be around for four years to own all of your stock or options (for the rest of this post, I’ll simply refer to the equity as “stock” although exactly the same logic applies to options.) If you leave the company earlier than the four year period, the vesting formula applies and you only get a percentage of your stock. As a result, many entrepreneurs view vesting as a way for VCs to “control them, their involvement, and their ownership in a company” which, while it can be true, is only a part of the story.
A typical stock vesting clause looks as follows:
Stock Vesting . All stock and stock equivalents issued after the Closing to employees, directors, consultants and other service providers will be subject to vesting provisions below unless different vesting is approved by the majority (including at least one director designated by the Investors) consent of the Board of Directors (the “Required Approval”): 25% to vest at the end of the first year following such issuance, with the remaining 75% to vest monthly over the next three years. The repurchase option shall provide that upon termination of the employment of the shareholder, with or without cause, the Company or its assignee (to the extent permissible under applicable securities law qualification) retains the option to repurchase at the lower of cost or the current fair market value any unvested shares held by such shareholder. Any issuance of shares in excess of the Employee Pool not approved by the Required Approval will be a dilutive event requiring adjustment of the conversion price as provided above and will be subject to the Investors’ first offer rights.
The outstanding Common Stock currently held by _________ and ___________ (the “Founders”) will be subject to similar vesting terms provided that the Founders shall be credited with [one year] of vesting as of the Closing, with their remaining unvested shares to vest monthly over three years.
Industry standard vesting for early stage companies is a one year cliff and monthly thereafter for a total of 4 years. This means that if you leave before the first year is up, you don’t vest any of your stock. After a year, you have vested 25% (that’s the “cliff”). Then – you begin vesting monthly (or quarterly, or annually) over the remaining period. So – if you have a monthly vest with a one year cliff and you leave the company after 18 months, you’ll have vested 37.25% of your stock.
Often, founders will get somewhat different vesting provisions than the balance of the employee base. A common term is the second paragraph above, where the founders receive one year of vesting credit at the closing and then vest the balance of their stock over the remaining 36 months. This type of vesting arrangement is typical in cases where the founders have started the company a year or more earlier then the VC investment and want to get some credit for existing time served.
Unvested stock typically “disappears into the ether” when someone leaves the company. The equity doesn’t get reallocated – rather it gets “reabsorbed” & # 8211; and everyone (VCs, stock, and option holders) all benefit ratably from the increase in ownership (or – more literally – the reverse dilution.”) In the case of founders stock, the unvested stuff just vanishes. In the case of unvested employee options, it usually goes back into the option pool to be reissued to future employees.
A key component of vesting is defining what happens (if anything) to vesting schedules upon a merger. “Single trigger” acceleration refers to automatic accelerated vesting upon a merger. “Double trigger” refers to two events needing to take place before accelerated vesting (e. g. a merger plus the act of being fired by the acquiring company.) Double trigger is much more common than single trigger. Acceleration on change of control is often a contentious point of negotiation between founders and VCs, as the founders will want to “get all their stock in a transaction – hey, we earned it!” and VCs will want to minimize the impact of the outstanding equity on their share of the purchase price. Most acquires will want there to be some forward looking incentive for founders, management, and employees, so they usually either prefer some unvested equity (to help incent folks to stick around for a period of time post acquisition) or they’ll include a separate management retention incentive as part of the deal value, which comes off the top, reducing the consideration that gets allocated to the equity ownership in the company. This often frustrates VCs (yeah – I hear you chuckling “haha – so what?”) since it puts them at cross-purposes with management in the M&A negotiation (everyone should be negotiating to maximize the value for all shareholders, not just specifically for themselves.) Although the actual legal language is not very interesting, it is included below.
In the event of a merger, consolidation, sale of assets or other change of control of the Company and should an Employee be terminated without cause within one year after such event, such person shall be entitled to [one year] of additional vesting. Other than the foregoing, there shall be no accelerated vesting in any event.”
Structuring acceleration on change of control terms used to be a huge deal in the 1990’s when “pooling of interests” was an accepted form of accounting treatment as there were significant constraints on any modifications to vesting agreements. Pooling was abolished in early 2000 and – under purchase accounting – there is no meaningful accounting impact in a merger of changing the vesting arrangements (including accelerating vesting). As a result, we usually recommend a balanced approach to acceleration (double trigger, one year acceleration) and recognize that in an M&A transaction, this will often be negotiated by all parties. Recognize that many VCs have a distinct point of view on this (e. g. some folks will NEVER do a deal with single trigger acceleration; some folks don’t care one way or the other) – make sure you are not negotiating against and “point of principle” on this one as VCs will often say “that’s how it is an we won’t do anything different.”
Recognize that vesting works for the founders as well as the VCs. I’ve been involved in a number of situations where one or more founders didn’t work out and the other founders wanted them to leave the company. If there had been no vesting provisions, the person who didn’t make it would have walked away with all their stock and the remaining founders would have had no differential ownership going forward. By vesting each founder, there is a clear incentive to work your hardest and participate constructively in the team, beyond the elusive founders “moral imperative.” Obviously, the same rule applies to employees – since equity is compensation and should be earned over time, vesting is the mechanism to insure the equity is earned over time.
Of course, time has a huge impact on the relevancy of vesting. In the late 1990’s, when companies often reached an exit event within two years of being founded, the vesting provisions – especially acceleration clauses – mattered a huge amount to the founders. Today – as we are back in a normal market where the typical gestation period of an early stage company is five to seven years, most people (especially founders and early employees) that stay with a company will be fully (or mostly) vested at the time of an exit event.
While it’s easy to set vesting up as a contentious issue between founders and VCs, we recommend the founding entrepreneurs view vesting as an overall “alignment tool” & # 8211; for themselves, their co-founders, early employees, and future employees. Anyone who has experienced an unfair vesting situation will have strong feelings about it – we believe fairness, a balanced approach, and consistency is the key to making vesting provisions work long term in a company.
Liquidation Preferences
I received a number of comments, private emails, and a few links to my post on Venture Capital Deal Algebra. The consistent theme was “tell me more about how VC investments work.” As a result, I’m going to write a series of posts on the structural and financial components of a typical venture capital investment. I’m going to use a bottom up approach – talking about individual components over time and then tying them together in a comprehensive term sheet.
An important place to start is the concept of a liquidation preference . Fred Wilson hints at it in his post on valuation. A liquidation preference is a standand (and rarely negotiable part) of a VC investment. It’s the downside protection on an investment that VCs expect to have as a baseline of any equity investment.
The vast majority of VC investments are structured as preferred stock . It’s called preferred because it “sits in front of” the common stock (or is “preferred to the common”) where common stock is the plain vanilla stock that a company has. Typically in VC investments, founders receive common stock, employees receive either common stock or options to purchase common stock, and the VCs receive preferred stock. This preferred stock has a series of special rights which almost always include a liquidation preference. The liquidation preference means that the VC will have the option – in a liquidity event – of either receiving their liquidation preference as their return or converting into common stock and receiving their percentage ownership as their return.
Considere el siguiente ejemplo. Acme Venture Capital (AVC) makes an investment in an established company called Homer Software that has been bootstrapped by the founders. Homer Software has shipped a product in an exciting market and generated $3m of revenue in the past 12 months. AVC invests $5m at a $10m pre-money valuation. As part of this investment, AVC and the founders of AVC agree to a 20% option pool for new employees that are going to be hired to be built into the pre-money valuation (see Venture Capital Deal Algebra if this doesn’t make sense). The result is that AVC owns 33.3% of the company, the founders own 46.7% of the company, and 20% is reserved for options for employees. In this example, AVC purchases Series A Preferred Stock that has a liquidation preference.
Now – consider two outcomes.
Homer Software continues its rapid growth and is acquired for $100m. AVC has a choice – either receive the liquidation preference ($5m) or convert to common and receive 33.3% of the proceeds ($33.3m). Easy choice.
Homer Software struggles and is acquired by a competitor for $9m. AVC again has a choice – either receive the liquidation preference ($5m) or convert to common and receive 33.3% of the proceeds ($3m). Again, easy choice.
When cash or public company stock is used in an acquisition, the valuation can be mathematically determined with certainty. However, when the acquirer is a private company, the valuation is much harder to determine and is often ambiguous as it depends on the value of the private company and the type of stock (common, preferred, junior preferred, or some other special class) being used. In these cases, the use of the liquidation preference is less clear cut and it’s critical that the company have objective, outside (independent) directors and experienced outside legal counsel to help with determining valuation.
One exception to the liquidity event is an IPO. Typically, an IPO will force the conversion of preferred stock to common stock, eliminating the liquidation preference. In most cases, the IPO event is an “upside liquidity event” so the need for the liquidation preference (and corresponding downside protection) is eliminated (although this is not always the case).
Next up – To Participate or Not (Participating Preferences) – an often maligned and typically hotly negotiated issue that is a more complex form of liquidation preference.
Great idea to write this series of posts. Cogent, concise, well written information about the ins and outs of the process of venture investing is actually hard to find.
I remember when I went to work for Primedia Ventures, having previously been a non-MBA journalist and entrepreneur, I read all the conventional basic books on VC. They were horrendous almost without exception. Poorly written, poorly edited. I remember reading a passage in Joseph Barlett's book over and over. What he described in the passage didn't make sense unless new stock had been issued, but nowhere did he write that new stock had been issued. I asked my wife to read it–who is a structured finance lawyer and no slouch at structuring deals–and she was as mystified as I was. It was just a poorly written, poorly edited book that provided no real illumination.
You and Fred should think about working up a little guide to venture as a book, I'm sure you could sell it and it would be a real contribution to the literature on the subject.
Great idea to write this series of posts. Cogent, concise, well written information about the ins and outs of the process of venture investing is actually hard to find.
I remember when I went to work for Primedia Ventures, having previously been a non-MBA journalist and entrepreneur, I read all the conventional basic books on VC. They were horrendous almost without exception. Poorly written, poorly edited. I remember reading a passage in Joseph Barlett's book over and over. What he described in the passage didn't make sense unless new stock had been issued, but nowhere did he write that new stock had been issued. I asked my wife to read it–who is a structured finance lawyer and no slouch at structuring deals–and she was as mystified as I was. It was just a poorly written, poorly edited book that provided no real illumination.
You and Fred should think about working up a little guide to venture as a book, I'm sure you could sell it and it would be a real contribution to the literature on the subject.
One addition: Most entrepreneurs and employees are confused why there needs to be two classes of stock… and are often surprised that there is some benefit beyond VC greed.
In order to price options as cheaply as possible (thus maximizing their use as a motivational tool), the stock associated with these options has to be truly different than the stock a VC buys… else, the government won't let you price common shares (and options) differently than preferred.
As it turns out, this is a big deal to employees, who would rather get options, say, at 10 cents vs. $1. (The $1/share being what the VC pays for a preferred share.)
So, something like a liquation preference can be used as a differentiator, which hopefully helps entrepreneurs and employees feel better about this class distinction.
As you tear into the components of the term sheet, though, it might get a bit uglier. Only two speeds of term sheets: Onerous and very onerous!
One addition: Most entrepreneurs and employees are confused why there needs to be two classes of stock… and are often surprised that there is some benefit beyond VC greed.
In order to price options as cheaply as possible (thus maximizing their use as a motivational tool), the stock associated with these options has to be truly different than the stock a VC buys… else, the government won't let you price common shares (and options) differently than preferred.
As it turns out, this is a big deal to employees, who would rather get options, say, at 10 cents vs. $1. (The $1/share being what the VC pays for a preferred share.)
So, something like a liquation preference can be used as a differentiator, which hopefully helps entrepreneurs and employees feel better about this class distinction.
As you tear into the components of the term sheet, though, it might get a bit uglier. Only two speeds of term sheets: Onerous and very onerous!
http://www. palmerpatent. com Tim Palmer
Brad, Great post. I think you could add some more information though – namely why a VC demands and liquidation preference (at least 1X). In your hypothetical example the founders (and employees) could decide to liquidate the company immediately after receiving the $5 mil from AVC – giving founders $2.33 M, and AVC $1.67 M. Also some "in the trenches" examples of different liquidation preferences would be great (any stories out there about bully VCs that received 5X preferences).
http://www. palmerpatent. com Tim Palmer
Brad, Great post. I think you could add some more information though – namely why a VC demands and liquidation preference (at least 1X). In your hypothetical example the founders (and employees) could decide to liquidate the company immediately after receiving the $5 mil from AVC – giving founders $2.33 M, and AVC $1.67 M. Also some “in the trenches” examples of different liquidation preferences would be great (any stories out there about bully VCs that received 5X preferences).
http://www. ruscico. com/eng/persons/74/ Akira Kurosawa
One addition: Most entrepreneurs and employees are confused why there needs to be two classes of stock… and are often surprised that there is some benefit beyond VC greed.
http://www. ruscico. com/eng/persons/74/ Akira Kurosawa
One addition: Most entrepreneurs and employees are confused why there needs to be two classes of stock… and are often surprised that there is some benefit beyond VC greed.
http://www. iskela. com/flowoftime/archives/000155.html Flow Of Time
Term sheet negotiations
If you think that a 'double dip' refers to dining and you are raising funds you better read Feld Thoughts…
http://www. iskela. com/flowoftime/archives/000155.html Flow Of Time
Term sheet negotiations
If you think that a 'double dip' refers to dining and you are raising funds you better read Feld Thoughts…
I have a question about how venture capital firms calculate their rates of return. I've heard of "Internal Rate of Return" which is a return based on cash inflow and outflow, and I have also heard of "Realization Multiples" which is a multiple of what has been distributed to what has been invested in the fund. I have done some research online, and many articles suggest an excess of 25% internal rate of return for venture investments…how does this reconcile with a realization multiple (i have heard it is about 3 x's…but logically/arithmetically how does it reconcile)
I have a question about how venture capital firms calculate their rates of return. I've heard of “Internal Rate of Return” which is a return based on cash inflow and outflow, and I have also heard of “Realization Multiples” which is a multiple of what has been distributed to what has been invested in the fund. I have done some research online, and many articles suggest an excess of 25% internal rate of return for venture investments…how does this reconcile with a realization multiple (i have heard it is about 3 x's…but logically/arithmetically how does it reconcile)
I have a question on stock options within a company. Is it legal for certain employees (management) to be given stock options with no vesting period (in other words stock is fully vested upon issuance) while all other employees are granted stock options with a vesting period of 2 years? Is this not discriminatory?
I have a question on stock options within a company. Is it legal for certain employees (management) to be given stock options with no vesting period (in other words stock is fully vested upon issuance) while all other employees are granted stock options with a vesting period of 2 years? Is this not discriminatory?
http://www. feld. com Brad Feld
This is perfectly legal.
Question
On January 1, 2008. Titania, Inc. granted stock options to officers and key employees for the purchase of 20,000 shares of the company s $10 par common stock at $25 per share. The options were exercisable within a 5-year period beginning January 1, 2010, by grantees still in the employ of the company, and expiring December 31, 2014. The service period for this award is 2 years. Assume that the fair value option-pricing model determines total compensation expense to be $350,000. On April 1, 2009, 2,000 option shares were terminated when the employees resigned from the company. The market value of the common stock was $35 per share on this sale. On March 31, 2010, 12,000option shares were exercised when the market value of the common stock was $40 per share. Prepare journal entries using the fair value method to record issuance of the stock options, termination of the stock options, exercise of the stock options, and changes to compensation expense, for the years ended December 31, 2008, 2009, and 2010.
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83(b) Election
A section 83(b) election is a tax election to include in your income the fair market value of property you have received in connection with the performance of services which you may not get to keep.
Generally, under the tax code, if you receive property in connection with the performance of services that you may not get to keep, and which you can’t transfer, you don’t have to take the fair market value of that property into income until it is determined that you will either (i) get to keep it, or (ii) the property becomes transferable.
Section 83(b) provides an opportunity for you to elect to be taxed at the time of the receipt of the property instead of waiting for the property to become transferable or no longer subject to a substantial risk of forfeiture.
Why Would You Want To Do This?
Why would you want to include in your taxable income the fair market value of property in excess of what you paid for it if you might not get to keep the property? There are a few different reasons:
Because the fair market value of the property at the time of receipt might be nominal–meaning, the tax might be insignificant, and an election will avoid a potentially much higher tax bill later.
Because the taxpayer might be paying the fair market value of the property so that electing to be taxed on its fair market value over what was paid for it means no tax is owed.
Because the value of the property might increase substantially and when it vests the tax on the fair market value of the property at that time might be more than the taxpayer will be able to afford.
Because the taxpayer might want his or her capital gains holding period start.
Example. Suppose a startup company founder is issued founders’ stock that is subject to a company repurchase at the stock’s cost, but the repurchase right lapses over a service based lapsing period. This founder has received stock, but because the stock is subject to a substantial risk of forfeiture (the at-cost repurchase right lapsing over the service based vesting period), the founder does not have to pay tax on his receipt of the stock until it vests. However, the founder may prefer to make a Section 83(b) election to pay tax on the value of the stock today because its value is lower than it is expected to be when it vests–or because the founder paid full value for it today, so the Section 83(b) election costs him no additional tax today. The making of the Section 83(b) election also starts the founder’s capital gains holding period. You Do Not Have To File an 83(b) Election If Your Shares Are Fully Vested You do not have to file a Section 83(b) election in connection your receipt of shares if those shares are not subject to vesting. If your shares are fully vested, no Section 83(b) election is required of you.
What Is The Character Of The Income?
Under Section 83(a) of the Internal Revenue Code, a taxpayer who receives property in connection with the performance of services must generally recognize as ordinary income the difference between the value of the property and the amount paid in exchange therefor at the first time the property is either transferable or not subject to a substantial risk of forfeiture . Section 83(b) allows a taxpayer who receives property in connection with the performance of services that is subject to such restrictions (e. g. nonvested property) to elect to recognize this income at the time of transfer. The principal benefit of a Section 83(b) election is that the taxpayer can lock in appreciation which is generally taxable at capital gains rates upon later disposition.
You Can’t Make An 83(b) Election With Respect To A Stock Option
It is a common misconception, but a Section 83(b) election generally cannot be made with respect to the receipt of a private company stock option . You must exercise the option first and acquire the stock before you can make a Section 83(b) election, and you would only make a Section 83(b) election in that instance if you exercised the option and acquired unvested stock (if the stock acquired on exercise of the stock option was vested, there would be no reason to make a Section 83(b) election).
Another common misconception is that Section 83 does not apply to restricted stock that is purchased at fair market value. Esto no es verdad. Section 83 applies even to stock that has been purchased at fair market value, if the stock is subject to a substantial risk of forfeiture and received in connection with the performance of services. See this case, Alves v. Commissioner .
An 83(b) election has to be filed with the IRS within 30 days of receipt of the property, a copy has to be filed with the tax return of the person making the election, and a copy must be provided to the company.
Additional information about making 83(b) Election (also embedded below).
By Elliot December 12, 2013 - 2:57 pm
I received a grant of stock earlier this year valued at $20k, and filed an 83(b). I left the company a month ago (same calendar year), and 75% of the stock grant will now be forfeited back to the company. I know that in general I need to pay tax on the full $20k worth of stock even though I’m only keeping $5k worth. Is there any exception if I notify the IRS that the stock is being taken back within the same calendar year that it was granted?
By Joe Wallin December 12, 2013 - 4:52 pm
Elliot, I don’t know if there is but given the end of year is closing I would encourage you to meet with tax counsel right away.
By rs January 13, 2014 - 8:20 pm
Joe, I had a big firm help me issue stock when we got our first big ($1.5M) investor–I vested several advisors with stock for their services and promised to issue shares later. A year and a half later I issued the stock at a nice valuation—but the letters I gave to the advisors on their “vested” % of the company were done at times of varying valuation ($2M to $4.5M and later more for investors). We are having a hard time getting a clear answer on tax treatment—and I feel I have been brutally failed by the large national law firm–we asked questions–got soft answers and went forward. I have one person who will look like they have $150K of shares in exchange for work for hire, and others with $40K of shares for services. Since they are not tradeable assets do we discount the tax liability if so where and when—do I issue 1099s to make this look like compensation given to advisors. ¿Tienes algún consejo? RS
By Joe Wallin January 13, 2014 - 8:24 pm
I am happy to try to help. Want to call me at 206 757 8184?
By w January 14, 2014 - 5:52 am
My company just offered me 5000 shares of restricted stock with a fair market value of $0.90 (example values), vesting over time. In addition to the paperwork to sign for receiving the shares, they included a pre-filled 83(b) form that lists the fair market value as $0.00 (not an example value!) and the amount I paid for it at $0 (which is correct).
Is that okay for them to say that the fair market value is $0?
Extra info: We are a small startup, and I know the $0.90 value was used recently with regards to (successfully) obtaining new funding. That $0.90 value is not included anywhere in restricted stock agreement itself.
Gracias por adelantado
By Joe Wallin January 14, 2014 - 5:55 am
I don’t think you can list zero as the value. Happy to discuss on the phone. 206 757 8184.
By StephenJacob January 14, 2014 - 11:52 pm
Unlike Joe, I am not a lawyer, so take what I say with a pinch of salt, but … that sounds very fishy indeed to me.
Unless the company sold all its assets and then bet the resultant cash on red (and lost), I don’t think stock _can_ be valued at $0.00. As long as the company is worth _anything_, the stock must (consequently) be worth something.
A pre-filled 83(b) sounds odd, and I fear for other employees who may have believed it and purchased stock and filed taxes based on the assumption. /
I will say, I don’t think the value of the stock has to match the price the most recent investor paid for it. If I understand correctly, they might have paid above the odds for preferred shares or for the right to buy in to a company which needed motivation to accept the funding. But if investors paid $0.90 I would guess your stock must have a value of at least a decent fraction of that.
It screams “AUDIT!” a mi.
By Scott February 26, 2014 - 12:37 pm
My issue is that I have already (and mistakenly) filed an 83(b) election for vested shares. Is this something that I need to go through the IRS to revoke? Or since it was an unnecessary form, will it just be invalidated and not require any action from me?
By Joe Wallin February 26, 2014 - 12:57 pm
When you filed the form, did you indicate that the value of the shares you received was the same as the price you paid?
By Joe Wallin February 26, 2014 - 4:08 pm
I think most tax accountants and lawyers would tell you it is a harmless error if there was no income to report, because you reported that the value you received was equal to what you paid for the property. Perhaps another member of the community here will chime in if they disagree. You could also post this question to Quora to see if anyone disagrees. Standard disclaimer–this doesn’t constitute legal or tax advice.
By Mayer June 1, 2014 - 2:19 pm
Great blog topic. I recently was hired by a startup that gave me 35,000 shares in lieu of cash for my consulting services. I paid nothing for the shares, and they are fully vested. The par value was listed as $0.0001. First, would I benefit from filing an 83b? Secondly, even though I paid nothing for those shares, does the IRS count them? How would I calculate the tax liability?
By Mayer June 1, 2014 - 2:21 pm
Sorry, on that second part I meant, “does the IRS see the granted shares as a tax liability?” Basically, do I have to pay taxes on shares I did not buy and have barely any value. )
By Joe Wallin June 2, 2014 - 11:41 am
Do you want to call me at 206 757 8184 and we can go over?
Short story–if the shares are fully vested, there is no 83(b) election that has to be filed, because you are going to be taxed on their full value on receipt.
You should consult a lawyer or tax professional who can quickly review the documents with you, to confirm that they are in fact fully vested.
You are taxed on their value as if company paid you cash. If you are an independent contractor, it will appear on a Form 1099–or should.
By Thomas July 6, 2014 - 9:53 am
Joe — great blog. I recently was hired by a startup where I was granted equity that vests over a schedule (so it meets the service requirement). I would like to make a 83b election but I do not know the fair market value. Since is didn’t purchase the shares, I do not have any basis (I. e. did not pay $X per share for Y shares), instead the grant is for a percent of the company’s equity. The agreement stipulates that any vested stock can be re-purchased by the company if employment is terminated based on a valuation formula that works as a multiple of revenue (different multiple based on whether I or the firm terminates). Question — how can I make an estimate of the current FMV of the grant that fits within IRS parameters? If I can get some existing revenue numbers from the company and apply the formula, is that adequate? Note that the revenue is very small, and given how much of a startup this is (a few guys), I might be able to make an argument that the value is near zero (there are no external investors that have invested and thus valued the firm at this point, no independent valuation has been made, etc). Gracias
By Joe Wallin July 6, 2014 - 10:06 am
I would urge you to hire a tax advisor right away. So you don’t miss a deadline. If you call me at 206 757 8184 or email me at [email protected] I can try to help you find someone.
By Lida September 15, 2014 - 5:27 pm
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By hugh martin October 11, 2014 - 11:26 am
What is the 83b equivalent for foreign investors in USA company?
By Eric Kwok November 18, 2014 - 10:25 pm
at the end of this blog, you mentioned “An 83(b) election has to be filed with the IRS within 30 days of receipt of the property, a copy has to be filed with the tax return of the person making the election, and a copy must be provided to the company.”. in 2013, my company is Pre-IPO and I early-exercise the ISO. 83(b) was filed within 30 days with receipt from IRS. I also gave a copy to my company. The only thing i forgot to do is to file a copy of 83(b) along with my 2013 tax return. Is it a problem? should I make it up by filing it with my 2014 tax return?
By Jodi November 24, 2014 - 12:07 pm
Can a S Corp company file an 83b election?
By Ryan March 10, 2015 - 10:56 am
Joe thanks for this column! I did some work with a startup in 2014 and for payment I was to receive RS. I filled out an agreement that included a pre-filled out 83b, provided by their lawyers, and was advised to complete it. The company never ended up issuing shares (not a well run company) and I have no proof of ownership at all, other than the agreement which is missing certificate numbers and transfer dates (almost like they intended to issue, but did not). Now tax time is here and I don’t know what to do. I filed the 83b properly, and the IRS acknowledged receipt, but I was never actually paid. It is also my understanding that upon making the 83b selection, this should have been processed through the company’s payroll dept. I have yet to receive a W-2 which leads me to believe this didn’t occur either. What should I do regarding taxes? Is the IRS going to expect a w-2 from them to be listed? I believe the company is no longer as it was a startup. Thanks for your assistance, I really appreciate it!
By Joe Wallin March 14, 2015 - 11:12 pm
Happy to discuss on the phone. 206 669 0997
By karin meyer August 27, 2015 - 11:39 am
Hopefully this thread hasn’t gone completely dead. I have conflicting advice on the need for an 83b filing for a multi-member LLC, with 50/50 ownership between its two members. In our Operating Agreement, we also state that a decreasing percentage of that ownership is subject to a Repurchase Option at Fair Market Price in the event that a member leaves or dies. This mimics the notion of vesting, but in fact, I believe we each own our shares outright since even in the event that we leave, we receive Fair Market Price. Is this consistent with your understanding? Thanks for all the great advice!!
By J B September 13, 2015 - 9:26 pm
Interesting question Karen – were you able to find a resolution?
By Michael December 7, 2015 - 11:30 pm
I filed an 83B within 30 days to the IRS, but I never got a response back. I sent it through certified mail, so I have a confirmation from the IRS department that they’ve received it, but I did not get a copy of my 83B back.
It is past the 30 days. ¿Qué debería hacer ahora?
Thank you for your advice!
By S-corp Election | January 19, 2016 - 6:00 am
[…] 83(b) Election | Startup Law Blog – Section 83(b) election provides an opportunity for the taxpayer to elect to be taxed at the time of the receipt of the property. […]
By Raoul Duffy February 1, 2016 - 11:45 am
I incorporated my company back in May 2014. At that time my partner and I purchased shares from the company outright. Three months later, we decided to amend the original founder purchase agreement to introduce some vesting terms (vesting over 4 years, starting to vest immediately in July 2014). Because the shares were initially sold in May 2014 without any vesting at that time (and therefore, no risk of forfeiture), my lawyer told me in July 2014 that I didn’t need to file an 83(B) Election. My lawyer mentioned that the requirement to file an 83(B) Election only applies if the shares were initially issued subject to a right of forfeiture and in my case, the shares were issues in march and at that time, were not subject to forfeiture and therefore no form was required to be filed. ¿Es esto correcto? Or was I supposed to file the 83(B) Form at the time of the stock purchase agreement amendment when we introduce some vesting terms? If my lawyer was wrong, is there a way to correct this mistake?
By Raoul Duffy February 1, 2016 - 12:41 pm
One clarification regarding the question above: In July when we introduced the vesting terms in the stock purchase amendment my partner and I technically kept ownership of the shares (since we had previously purchased them in May) but the vesting terms that we agreed upon were formulated such as in a case of a departure the company would have the right to repurchase the non-vested shares from the Partners.
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Rule 144: Selling Restricted and Control Securities
When you acquire restricted securities or hold control securities, you must find an exemption from the SEC's registration requirements to sell them in a public marketplace. Rule 144 allows public resale of restricted and control securities if a number of conditions are met. This overview tells you what you need to know about selling your restricted or control securities. It also describes how to have a restrictive legend removed.
What Are Restricted and Control Securities?
Restricted securities are securities acquired in unregistered, private sales from the issuing company or from an affiliate of the issuer. Investors typically receive restricted securities through private placement offerings, Regulation D offerings, employee stock benefit plans, as compensation for professional services, or in exchange for providing "seed money" or start-up capital to the company. Rule 144(a)(3) identifies what sales produce restricted securities.
Control securities are those held by an affiliate of the issuing company. An affiliate is a person, such as an executive officer, a director or large shareholder, in a relationship of control with the issuer. Control means the power to direct the management and policies of the company in question, whether through the ownership of voting securities, by contract, or otherwise. If you buy securities from a controlling person or "affiliate," you take restricted securities, even if they were not restricted in the affiliate's hands.
If you acquire restrictive securities, you almost always will receive a certificate stamped with a "restrictive" leyenda. The legend indicates that the securities may not be resold in the marketplace unless they are registered with the SEC or are exempt from the registration requirements. Certificates for control securities usually are not stamped with a legend.
What Are the Conditions of Rule 144?
If you want to sell your restricted or control securities to the public, you can meet the applicable conditions set forth in Rule 144. The rule is not the exclusive means for selling restricted or control securities, but provides a "safe harbor" exemption to sellers. The rule's five conditions are summarized below:
Additional securities purchased from the issuer do not affect the holding period of previously purchased securities of the same class. If you purchased restricted securities from another non-affiliate, you can tack on that non-affiliate's holding period to your holding period. For gifts made by an affiliate, the holding period begins when the affiliate acquired the securities and not on the date of the gift. In the case of a stock option, including employee stock options, the holding period begins on the date the option is exercised and not the date it is granted.
Holding Period . Before you may sell any restricted securities in the marketplace, you must hold them for a certain period of time. If the company that issued the securities is a “reporting company” in that it is subject to the reporting requirements of the Securities Exchange Act of 1934, then you must hold the securities for at least six months. If the issuer of the securities is not subject to the reporting requirements, then you must hold the securities for at least one year. The relevant holding period begins when the securities were bought and fully paid for. The holding period only applies to restricted securities. Because securities acquired in the public market are not restricted, there is no holding period for an affiliate who purchases securities of the issuer in the marketplace. But the resale of an affiliate's shares as control securities is subject to the other conditions of the rule.
Current Public Information . There must be adequate current information about the issuing company publicly available before the sale can be made. For reporting companies, this generally means that the companies have complied with the periodic reporting requirements of the Securities Exchange Act of 1934. For non-reporting companies, this means that certain company information, including information regarding the nature of its business, the identity of its officers and directors, and its financial statements, is publicly available.
Trading Volume Formula . If you are an affiliate, the number of equity securities you may sell during any three-month period cannot exceed the greater of 1% of the outstanding shares of the same class being sold, or if the class is listed on a stock exchange, the greater of 1% or the average reported weekly trading volume during the four weeks preceding the filing of a notice of sale on Form 144. Over-the-counter stocks, including those quoted on the OTC Bulletin Board and the Pink Sheets. can only be sold using the 1% measurement.
Ordinary Brokerage Transactions . If you are an affiliate, the sales must be handled in all respects as routine trading transactions, and brokers may not receive more than a normal commission. Neither the seller nor the broker can solicit orders to buy the securities.
Filing a Notice of Proposed Sale With the SEC . If you are an affiliate, you must file a notice with the SEC on Form 144 if the sale involves more than 5,000 shares or the aggregate dollar amount is greater than $50,000 in any three-month period.
If I Am Not an Affiliate of the Issuer, What Conditions of Rule 144 Must I Comply With?
If you are not (and have not been for at least three months) an affiliate of the company issuing the securities and have held the restricted securities for at least one year, you can sell the securities without regard to the conditions in Rule 144 discussed above. If the issuer of the securities is subject to the Exchange Act reporting requirements and you have held the securities for at least six months but less than one year, you may sell the securities as long as you satisfy the current public information condition.
Can the Securities Be Sold Publicly If the Conditions of Rule 144 Have Been Met?
Even if you have met the conditions of Rule 144, you can't sell your restricted securities to the public until you've gotten the legend removed from the certificate. Only a transfer agent can remove a restrictive legend. But the transfer agent won't remove the legend unless you've obtained the consent of the issuer—usually in the form of an opinion letter from the issuer's counsel—that the restrictive legend can be removed. Unless this happens, the transfer agent doesn't have the authority to remove the legend and permit execution of the trade in the marketplace.
To begin the legend removal process, an investor should contact the company that issued the securities, or the transfer agent for the securities, to ask about the procedures for removing a legend. Removing the legend can be a complicated process requiring you to work with an attorney who specializes in securities law.
What If a Dispute Arises Over Whether I Can Remove the Legend?
If a dispute arises about whether a restrictive legend can be removed, the SEC will not intervene. Removal of a legend is a matter solely in the discretion of the issuer of the securities. State law, not federal law, covers disputes about the removal of legends. Thus, the SEC will not take action in any decision or dispute about removing a restrictive legend.
423-Qualified ESPP Tax Calculator
Visión de conjunto
An ESPP is a benefit plan that allows employees to purchase stock from their company at below market price. Usually income from your paycheck is withheld for a certain period of time (say, 6 months) and then used to buy stock at the end of the period.
Your tax rate for the transaction depends on how long you hold the stock before selling it.
To get favorable tax treatment, you have to hold the stock for 2 years after the grant of the ESPP (the start of the withholding period) and 1 year after the stock is purchased. Assuming a 6 month withholding period, you'd need to hold the stock for 18 months after purchase to fulfull the holding period.
Since this is a 423-qualfied ESPP, there is no tax when the stock is purchased, only when the stock is sold.
I am an accounting hobbyist and not a tax professional. These calculations are just for fun! Don't trust me! Don't blame me! Don't tase me!
Glosario
Disqualifying Distribution Selling the stock before end of the holding period Qualifying Distribution Selling the stock after the end of the holding period Market Price The stock price on the open market on the day that the stock is purchased. Lookback Price The stock price that is used to set the actual price for employees (the more generous the plan, the longer the lookback Discount Employees purchase stock at a discount on the lookback price. Usually between 10% - 15%. Sale Price The stock price when you sell Regular tax rate Your tax rate for ordinary income Long-term capital gains tax rate The current tax rate for long-term capital gains (default 15%) Investment How much you will invest in the ESPP in a given period
Calculadora
Resultados
Resultados
How to make a billion dollars from stocks in 5 years.
You thought you would need more didn’t you? No, $1000 will do.
Now take your favorite stock, I’m going to pick Microsoft as our example. Microsoft is hardly the sort of crazy penny stock that the get rich quick merchants push at you and it isn’t some crazy pink sheet company with a way of turning water into gasoline.
Microsoft is no Apple miracle. It is a boring blue chip stock, but look at its price history.
Register for free ADVFN account and you can see on an average day over the last 10 years Microsoft moves 2.1% from low to high.
Let’s forget the rest of the market, news and FX – instead we’ll just watch the stock trade.
How hard can it be to pick the bottom and buy and then spot the top and sell?
Afterall, if you did nothing but stare at Microsoft for the next 2 months you are going to get pretty intimate with the stock.
Lets not get greedy, lets just capture 1%. This means we don’t have to grab the bottom or the top, just get near the bottom and out near the top.
This leaves 1.1% on average day missed, but who knows, perhaps you might get more than 1% on an average day.
However we should not be greedy and instead aim for 1% per day. How many days will it take us to get to a billion dollars?
A thousand years?
A hundred years, perhaps?
No. It will take just 5 years and 4 months.
Sadly there are only 251 trading days in a year but if you could trade every day, like you can in Forex, you could turn a thousand dollars into a billion in 3 years and 9 months.
Hasta aquí todo bien. At this point you have two choices.
1) Stop reading and open a brokerage account with $1000 or 2) read on and find out why this simple road to vast riches can’t be taken.
The market is random. If you don’t believe me you can get on with the plan I already outlined
If you do believe me then read on and you will discover the real secret of getting rich investing in the stock market.
Compounding is the secret to getting rich investing in the stock market.
Compounding takes $1000 to a trillion in 1389 trading days at 1% a day and to a trillion in 2080 trading days. You could pay off the US national debt with the profits from your $1000 in less than 2400 days.
Clearly, compounding is incredibly powerful - even a miniscule rates and it can turn thousands into millions over a twenty year horizon.
If you saved $5000 a year and managed to make a 15% yearly profit from your capital, at the end of 30 years, you end up with $2.5m.
The permutations are, of course, endless. You might start with less yearly savings and take a few years to get your investing skill honed. Who knows you might be a genius and get 25%.
Some years will be crazily bullish and other horribly bearish, but in the long run the power of compounding will deliver.
While you will likely not be able to make a billion in 5 years, compounding your gains is how you take your wealth to the next level and the stock market is the place to go to do it.
This area of the ADVFN. com site is for independent financial commentary. These blogs are provided by independent authors via a common carrier platform and do not represent the opinions of ADVFN Plc. ADVFN Plc does not monitor, approve, endorse or exert editorial control over these articles and does not therefore accept responsibility for or make any warranties in connection with or recommend that you or any third party rely on such information. The information available at ADVFN. com is for your general information and use and is not intended to address your particular requirements. In particular, the information does not constitute any form of advice or recommendation by ADVFN. COM and is not intended to be relied upon by users in making (or refraining from making) any investment decisions.
Comentarios
Considering IRA rollovers
Making the right distribution decision now can make a big difference down the road.
Eres tú. Changing jobs? Changing careers? Retiring?
If you are receiving a distribution from a company retirement plan, there are important decisions you need to make. sooner than you may think. How will you preserve the retirement funds you have accumulated to provide the income stream you will need for your future? There are several options to consider that can help you protect the security you’ve earned from unnecessary or untimely income tax treatment.
What decisions need to be made?
Do you want the money now? If you want to take all or part of your money in cash, you will pay ordinary income taxes – and probably a 10% penalty – on whatever portion is not rolled directly into an individual retirement account or another employer’s plan.
Do you want to pay the tax later? If you want to keep deferring taxes and maintain control over your money, you can transfer your accumulated assets directly from the current plan into an IRA or another employer’s plan if the plan allows a rollover.
Do you want to pay a one-time tax today? If you want to take advantage of the Roth IRA and ultimately withdraw your money tax-free, you can roll over directly to a Roth IRA, which would require you to pay tax on the distribution amount in the year of the rollover to the Roth IRA.
Your individual circumstances will determine which option is right for you. This guide provides information on different options, but is an overview at best. Raymond James financial advisors can help you review your own personal situation before making a decision regarding your distribution. We will take the time to understand your individual needs and objectives, then help you implement the appropriate strategy.
Taking the money now
If you want the money now, it will cost you. By law, qualified plans are required to withhold 20% as a prepayment toward federal income taxes. So right away you will have lost the use of one-fifth of your retirement assets. If you are not at least age 59½, disabled or leaving your job after the age of 55, you are subject to an additional 10% federal tax as a premature withdrawal penalty. State taxes may also apply.
Employer stock distribution options
Participants who have highly appreciated employer stock should consider taking an in-kind distribution of the stock, instead of rolling over to an IRA. Here’s why:
Upon distribution, ordinary income tax is paid on the original cost basis of the stock. The cost basis is the price at which the stock was allocated to the participant.
The difference between the cost basis and the current fair market value is called the net unrealized appreciation. The NUA remains tax-deferred until the securities are sold.
When the stock is sold, the NUA, or appreciation in the stock, is taxed as a long-term capital gain.
The advantage to this strategy is the difference between ordinary income tax rates and long-term capital gain rates.
In order for this strategy to work, individuals must take a lump-sum distribution of all assets in the plan to qualify, although they can roll part of the assets to an IRA. The rollover should be direct to avoid the mandatory 20% withholding. The following example should clarify how this works:
Kevin, 50 years old, retires from Sun Company with 1,000 shares of company stock with a fair market value of $50,000. Kevin paid $10 per share for a cost basis of $10,000. His NUA is $40,000 ($50,000 minus $10,000).
If Kevin elects to take a lump-sum distribution, assuming a 25% federal tax bracket, he will pay $2,500 on the original cost basis and a 10% penalty for being younger than 59½, or $1,000. The $40,000 of appreciation, or NUA, is tax-deferred until sold, at which time it would be taxed at the long-term capital gains rate of 15%.
If Kevin elects to roll over to an IRA and then take a distribution, he will pay ordinary income tax on whatever amount he distributes. If he distributes the $50,000, the tax will be 25% of $50,000, or $12,500 (plus the 10% penalty for being younger than 59½ or $5,000).
In Kevin’s case, there is a significant difference in the tax owed. This strategy works well when capital gains rates are lower than ordinary income tax rates.
Forward averaging. If you were born before January 1, 1936, you may use 10-year forward averaging. The tax on a lump-sum distribution is due for the tax year in which the distribution is made. Forward averaging is a method of calculating the tax that may result in a lower tax burden. Forward averaging can only be used once in your lifetime, so consideration should be given as to the possibility of a future lump-sum distribution. As Raymond James financial advisors, we can discuss this option with you in more detail.
Deferring all taxes until later
If you want to avoid any current taxes, you must have your retirement plan money transferred directly into an IRA (referred to as a “direct rollover”), leave it in your former employer’s plan or transfer it directly into a new employer’s plan.
However, it is important to understand the distribution options and procedures of your former employer’s plan. If you want to avoid the 20% withholding tax discussed earlier, you must specifically request a direct rollover. This involves the distribution transferring directly from the current custodian to the new custodian. The withholding tax is required if you physically take possession of the distribution amount, even if you intend to roll it over to an IRA. If the 20% is withheld, you must provide cash from other savings to make up this amount. If you do not do so within 60 days, the portion withheld will be deemed a distribution and taxed and penalized, if applicable.
Summary of an IRA rollover Benefits:
Maintain tax-deferred status of your retirement savings.
Direct your own assets.
Avoid taxes, penalties and the 20% withholding.
Take penalty-free early distributions prior to age 59½ for certain purposes, including:
First-time home purchase expenses ($10,000 lifetime limit)
Qualified higher education expenses
Certain medical expenses in excess of 7.5% of adjusted gross income
Certain unemployment expenses
Series of substantially equal payments under section 72(t)
Death or disability
Cómo funciona:
To avoid the 20% withholding tax on qualified plan distributions, you must elect a direct rollover to the IRA.
Stock received in a distribution can be rolled over, or it can be sold and the proceeds of the sale can be rolled over.
If you do not elect a direct rollover, 20% will be withheld upon distribution. You can still avoid taxes on the distribution by rolling over to an IRA within 60 days of receipt of your distribution.
Example: Joe takes a distribution of his $100,000 employer profit sharing account when he changes jobs. His former employer sends $20,000 to the IRS and a check to Joe for $80,000. If Joe can access $20,000 from another source, the entire $100,000 can be rolled over to an IRA, thus avoiding any tax consequence on the distribution. When he files his tax return, the $20,000 that was withheld would, in effect, be refunded. If not, the $20,000 will be deemed a distribution. It will be taxed at Joe’s ordinary income tax rate and penalized 10% since Joe is under age 59½.
Pay the tax now & tax-free distributions later
The Roth IRA is a retirement savings account in which contributions are made after tax. The investments in a Roth IRA grow tax-free and are distributed tax-free under certain circumstances.
Thanks to changes in the Pension Protection Act of 2006, a distribution from a qualified pension or profit sharing plan can now be rolled over into a Roth IRA. If the rollover amount was from a Roth 401(k) or other Roth money, no income limit applies. However, if the rollover was from taxable qualified plan contributions, the rollover will be considered a conversion to a Roth IRA.
This rollover to the Roth IRA is technically known as a “conversion.” The advantage to this strategy is that, after the tax is paid on the conversion to the Roth IRA, there is no further tax, as long as the money stays in the Roth IRA a minimum of five years and the person reaches age 59½, dies, becomes disabled or the money is used for a qualified first-time home purchase ($10,000 lifetime maximum).
A distribution rolled over or converted into a Roth IRA is not subject to the 10% premature withdrawal penalty tax imposed on withdrawals from traditional IRAs before age 59½.
Common questions about retirement plan distributions
What is a lump-sum distribution?
It is a payment or payments (occurring within one calendar year) from a pension or profit sharing plan. It represents all contributions made by you or your employer, as well as all earnings.
What is an IRA rollover?
An IRA rollover is a tax-sheltered vehicle for retirement benefits received (a “distribution”) from an employer-sponsored plan. Taxes on all dividends, interest and gains are deferred until withdrawn. Because the assets in an IRA rollover are untaxed dollars, they compound tax-free and grow more rapidly than money placed in a taxable account.
What type of distribution can be rolled over to an IRA?
To be eligible for placement in an IRA rollover, the distribution must be considered an “eligible rollover distribution.” An eligible rollover distribution must meet the following criteria:
1. It must be paid from a “qualified” plan or “employer IRA” such as:
Pension plans
Profit sharing plans
401(k) plans
Employee stock ownership plans
Keogh plans (pension or profit sharing plans for self-employed persons)
457 state and local government plans
SEP IRAs
SIMPLE IRAs
Distributions from 403(b) plans established for teachers, hospital employees and other employees of nonprofit organizations may also be eligible for rollover treatment.
2. The payment must not be made in any of the following forms:
One of a series of substantially equal payments based on life expectancy
One of a series of installment payments payable over 10 years or more
All or part of a required minimum distribution
A return of any excess deferrals or excess contributions, a refund of life insurance costs, or as a deemed distribution due to a loan default
A hardship distribution
What if I want to roll over part of my distribution and keep part for immediate use?
You may roll over any part of your lump-sum distribution and keep the rest. However, 20% of what you don’t transfer directly into an IRA rollover will be withheld against taxes. If you have a $10,000 distribution and you do a direct rollover of $9,000, then $200 (20% of the $1,000 you didn’t roll over) will be withheld.
What are the advantages of placing a qualified distribution into an IRA rollover?
Placing an eligible distribution into an IRA will avoid current taxes and perhaps a 10% penalty tax as well. Rolling over your distribution will allow the full value of your accumulated benefits to continue to grow and be available for your retirement years. You may also want to consider placing the distribution in another employer’s plan if that plan allows a rollover.
What are the tax reporting requirements related to rolling over my qualified plan distribution?
Under current regulations, there are no special tax forms to file when rolling over a qualified distribution to an IRA.
Soon after the end of the year in which you receive the distribution, the trustee of your employer’s plan will send a Form 1099-R to the IRS and forward a copy to you. The 1099-R indicates the amount of your distribution. This amount is entered on your income tax return (IRS Form 1040). If you elected a direct rollover of the total distribution into an IRA, it is excluded from total taxable income. If you elected a conversion into a Roth IRA, you also will be issued a 1099-R indicating the amount you must pay tax on; however, you will not be subject to the 10% penalty on the conversion. (If you do not roll over the full distribution, the part that you keep will be included in your taxable income for the year.) Once the rollover is completed, current law does not require any other IRS filings or reports.
What happens to the voluntary after-tax contributions I’ve made to my employer’s plan?
If you made voluntary after-tax contributions to your employer’s retirement plan, you may roll these funds directly into your IRA or place these funds in a regular taxable account. If you take this money in cash, you will not be subject to the 10% penalty. However, rolling this money to an IRA will increase your accumulation for retirement. Additionally, you will need to file the IRS Form 8606 to keep track of the cost basis, so upon distribution, you do not pay taxes on these assets again.
Is it possible to combine my distribution with another IRA I already have?
Sí. Eligible distributions placed in an IRA rollover retain “portability.” Portability allows you, at any time, to return the amount in your IRA rollover into another employer-sponsored pension or profit sharing plan in which you participate and which provides for such transfers (assuming those plans allow rollovers).
Can I elect a rollover to an IRA even after the age of 70½?
There are no age restrictions for electing an IRA rollover, but by April 1 of the year following the year in which you reach age 70½, you must begin to make withdrawals, which cannot be rolled over.
What is the tax status of an IRA distribution?
IRA distributions will be taxed as ordinary income in the year received and may be subject to premature withdrawal penalties.
What are my IRA distribution options?
IRS rules govern when these assets can be removed from your IRA without penalty. The Tax Reform Act of 1986 adopted an early withdrawal program that allows a person to withdraw from an IRA prior to age 59½ without penalty. You can withdraw money from an IRA before age 59½ if you receive distributions as part of a series of equal payments based on your life expectancy. The payments must continue for at least five years or until you reach age 59½, whichever is longer. For example, if you are age 57, you can begin a series of annual payments but you cannot alter or stop the payment schedule until you are 62. If you begin withdrawals at age 52, you cannot alter or stop the payment schedule until you are 59½.
Between the ages of 59½ and 70½, you may withdraw as much or as little from your IRA as you choose. The standard rule is that if you take an IRA distribution before you reach age 59½, the amount distributed is subject to an additional 10% penalty tax.
Beginning with the year you turn age 70½, certain minimum distributions must be taken at least annually from your IRA to avoid substantial penalty taxes. The IRS penalty for not taking the required minimum distributions from your IRA after age 70½ is 50% of the difference between the amount that should have been distributed and the amount actually distributed from the IRA. You should also be aware that you may be required to make estimated tax payments whether or not you request the standard 10% withholding on distributions from your IRA.
Reviewing the facts
Making an informed decision about your retirement plan assets requires careful consideration of the alternatives. Now that we’ve introduced several possible strategies, the following chart should help you review the benefits – as well the possible drawbacks – of the various options you can choose.
Spin-Offs and Split-Offs
Spin-Offs
In a spin-off, the parent company (ParentCo) distributes to its existing shareholders new shares in a subsidiary, thereby creating a separate legal entity with its own management team and board of directors. The distribution is conducted pro-rata, such that each existing shareholder receives stock of the subsidiary in proportion to the amount of parent company stock already held. No cash changes hands, and the shareholders of the original parent company become the shareholders of the newly spun company (SpinCo).
Strategic Rationale
Divesting a subsidiary can achieve a variety of strategic objectives, such as:
Unlocking hidden value – Establish a public market valuation for undervalued assets and create a pure-play entity that is transparent and easier to value
Undiversification – Divest non-core businesses and sharpen strategic focus when direct sale to a strategic or financial buyer is either not compelling or not possible
Institutional sponsorship – Promote equity research coverage and ownership by sophisticated institutional investors, either of which tend to validate SpinCo as a standalone business
Public currency – Create a public currency for acquisitions and stock-based compensation programs
Motivating management – Improve performance by better aligning management incentives with SpinCo's performance (using SpinCo, rather than ParentCo, stock-based awards), creating direct accountability to public shareholders, and increasing transparency into management performance
Eliminating dissynergies – Reduce bureaucracy and give SpinCo management complete autonomy
Anti-trust – Break up a business in response to anti-trust concerns
Corporate defense – Divest "crown jewel" assets to make a hostile takeover of ParentCo less attractive
Transaction Structure
In general, there are four ways to execute a spin-off:
Regular spin-off – Completed all at once in a 100% distribution to shareholders
Majority spin-off – Parent retains a minority interest (< 20%) in SpinCo and distributes the majority of the SpinCo stock to shareholders
Equity carve out (IPO) / spin-off – Implemented as a second step following an earlier equity carve-out of less than 20% of the voting control of the subsidiary
Reverse Morris Trust – Implemented as a first step immediately preceding a Reverse Morris Trust transaction
ParentCo's existing credit agreements may impose restrictions on divestitures that are material in nature. It is important to determine if any credit terms will be violated if ParentCo spins off a subsidiary that materially contributes to its business.
Implicaciones fiscales
A spin-off is usually tax-free under Internal Revenue Code (IRC) Section 355, meaning that no taxable gain is recognized by either the parent entity or the parent's existing shareholders. To qualify for favorable tax treatment, the spin-off must meet the requirements of Section 355:
The parent and subsidiary must both have been engaged in an "active trade or business" the entire 5 years preceding the spin-off, and neither entity may have been acquired during that period in a taxable transaction.
ParentCo and SpinCo must continue in an active trade or business following separation.
ParentCo must have tax control before the spin-off, defined as ownership of at least 80% of the vote and value of all classes of subsidiary stock.
ParentCo must relinquish tax control as a result of the spin-off (< 80% vote and value).
The spin-off must have a valid business purpose, and cannot be used as a "device" to distribute earnings (dividends).
The parent's shareholders, collectively, must retain continuity of interest in both parent and subsidiary for a 4-year period beginning 2 years before the spin-off by maintaining 50% equity ownership interest in both companies (a change in control of either ParentCo or SpinCo during this period could trigger a tax liability for the ParentCo). This is the anti-Morris Trust rule .
If the unusual event that a spin-off does not qualify for tax-free treatment, there are two levels of tax:
Ordinary income at the shareholder level equal to the FMV of subsidiary stock received (similar to a dividend) and
Capital gain on the sale of stock at the parent entity level equal to the FMV of subsidiary stock distributed less the parent's inside basis in that stock.
Any cash received by shareholders in lieu of fractional shares of SpinCo is generally taxable to shareholders.
Accounting for Spin-Offs
From the announcement of the spin-off until the date it is completed, the parent accounts for the disposition of its subsidiary in a single line item on its balance sheet called Net Assets of Discontinued Operations . or similar. The parent also segregates the net income attributable to the subsidiary on its income statement in an account called Income from Discontinued Operations . or similar.
The spin-off is recorded at book value on the transaction date as follows:
Parent's Journal Entry
Monetization Techniques
The parent company will often extract value from the subsidiary before spinning it off by levering up SpinCo and siphoning the cash proceeds as a special tax-free dividend (courtesy of the 100% DRD ) or pushing down debt to SpinCo. The special dividend and amount of debt pushdown are both limited in size to ParentCo's inside basis in the subsidiary's assets. If either exceeds the inside basis, the spin-off is taxable to the extent of the excess. The amount of debt ParentCo can push down to SpinCo is also limited by SpinCo's ability to service the debt.
Exhibit A – Monetization of Verizon's Spin-Off of Idearc
The following is excerpted from an Idearc 8-K filing detailing its spin-off from Verizon, and outlines how Verizon monetized the spin-off:
On November 17, 2006, Verizon Communications Inc. ("Verizon") spun off the companies that comprised its domestic print and Internet yellow pages directories publishing operations. In connection with the spin-off, Verizon transferred to Idearc Inc. ("Idearc") all of its ownership interest in Idearc Information Services LLC and other assets, liabilities, businesses and employees primarily related to Verizon's domestic print and Internet yellow pages directories publishing operations (the "Contribution"). The spin-off was completed by making a pro rata distribution to Verizon's shareholders of all of the outstanding shares of common stock of Idearc.
In connection with the spin-off, on November 17, 2006, and in consideration for the Contribution, Idearc (1) issued to Verizon additional shares of Idearc common stock, (2) issued to Verizon $2.85 billion aggregate principal amount of Idearc's 8% senior notes due 2016 and $4.3 billion aggregate principal amount of loans under Idearc's tranche B term loan facility (collectively, the "Idearc Debt Obligations") and (3) transferred to Verizon approximately $2.4 billion in cash from cash on hand, from the proceeds of loans under Idearc's tranche A term loan facility and from the proceeds of the remaining portion of the loans under Idearc's tranche B term loan facility.
Creative monetization techniques such as debt-for-debt and debt-for-equity swaps, or exchanges, allow ParentCo to extract value in excess of its basis in SpinCo's stock without affecting the tax-free nature of the spin-off.
Debt-for-Debt Swaps
In a debt-for-debt swap, the parent company (ParentCo) uses an investment bank as an intermediary to retire debt in connection with a spin-off. Generally speaking, a debt-for-debt swap is executed as follows:
ParentCo contributes assets to SpinCo in exchange for all of SpinCo's common stock and SpinCo notes
An investment bank purchases previously-issued ParentCo debt securities in the market
ParentCo swaps with the investment bank its SpinCo notes for a like amount of its own debt securities, which it then retires
The investment bank sells the SpinCo notes
A debt-for-equity swap is mechanically similar to a debt-for-debt swap, except that ParentCo swaps its SpinCo notes for ParentCo stock . Thus, the debt-for-equity swap resembles a stock repurchase rather than debt retirement.
Capital Markets Implications of Spin-Offs
The separate business entities created in a spin-off sometimes differ in many ways from the consolidated company, and may no longer be suitable investments for some original shareholders. Spun-off companies are often much smaller than their original parents, and are frequently characterized by higher growth. Institutional investors committed to specific investment styles (e. g. value, growth, large-cap, etc.) or subject to certain fiduciary restrictions may need to realign their holdings with their investment objectives following a spin-off by one of their portfolio companies. For example, index funds would be forced to indiscriminately sell SpinCo stock if SpinCo is not included in the particular index.
As institutional investors "rotate out" of, or sell, their parent and/or new subsidiary stock, the stocks may face short-term downward pricing pressure lasting weeks or even months until the shareholder bases reach new equilibriums. Shareholder churn and the corresponding potential for short-term pricing pressure can affect timing of a spin-off when CEOs are sensitive to stock price performance.
On the other hand, spin-offs are commonly executed in response to shareholder pressure to divest a subsidiary, perhaps because the hypothetical sum-of-the-parts valuation exceeds the current value of the consolidated enterprise. In these cases, the parent and/or new subsidiary stock may experience upward pricing pressure following a spin-off that mitigates downward pressure due to shareholder rotation. In the long run, stocks of the individual companies should theoretically trade higher in aggregate than stock of the consolidated company when the spin-off is well-received by investors.
Also, when SpinCo is highly levered as a result of debt pushdown or loans incurred prior to spin-off, shareholder returns receive a boost when SpinCo generates returns in excess of its cost of capital. The effect is identical to how the use of leverage in LBO transactions magnifies returns to financial buyers.
Sponsored Spin-Offs
In a sponsored spin-off, a financial sponsor (e. g. private equity fund) generally makes a pre-arranged "anchor" investment in a newly spun company (SpinCo). Participation by a sophisticated investor is viewed favorably by the market because it validates SpinCo as a standalone business and serves as an endorsement of SpinCo's management team. The mechanics of a sponsored spin-off are similar to those in Morris Trust transactions.
To qualify for tax-free treatment, the transaction must meet the conditions of Section 355 described above. Additionally, Section 355(e), known as the anti-Morris Trust rule . limits the sponsor's investment to less than 50% of the vote and value of SpinCo's outstanding stock when the investment is made in connection with the spin-off. In general, if the sponsor's participation is arranged prior to or within 6 months after the spin-off, the sponsor can acquire no more than a minority interest in SpinCo without compromising the tax-free nature of the transaction.
As a result of the Section 355(e) restriction, the sponsor will not have legal control over SpinCo following the investment. Also, unlike traditional privately held portfolio companies, SpinCo will be a public company subject to SEC reporting requirements whose share price will fluctuate in market.
The sponsor has several exit options. If the sponsor's equity stake appreciates in value, it can readily sell the appreciated SpinCo shares in the market. If the shares decline in value and the sponsor continues to view SpinCo as a good investment, the sponsor may acquire additional shares at a low price and gain control of SpinCo following the 2-year waiting period, possibly even taking SpinCo private.
The sponsored spin-off may be alternatively structured as an investment in ParentCo, rather than SpinCo. In this case, ParentCo would spin off assets not wanted by the sponsor prior to the sponsor's investment in ParentCo. Since any subsequent event compromising tax-free treatment of the original transaction would create a tax liability for ParentCo, the sponsor would be sure to include a tax indemnification clause in the transaction agreement.
You can learn more about sponsored spin-offs in articles posted on TheDeal. com and AltAssets. com .
Split-Offs
In a split-off, the parent company offers its shareholders the opportunity to exchange their ParentCo shares for new shares of a subsidiary (SplitCo). This tender offer often includes a premium to encourage existing ParentCo shareholders to accept the offer. For example, ParentCo might offer its shareholders $11.00 worth of SplitCo stock in exchange for $10.00 of ParentCo stock (a 10% premium).
If the tender offer is oversubscribed, meaning that more ParentCo shares are tendered than SplitCo shares are offered, the exchange is conducted on a pro-rata basis. If the tender offer is undersubscribed, meaning that too few ParentCo shareholders accept the tender offer, ParentCo will usually distribute the remaining unsubscribed SplitCo shares pro-rata via a spin-off.
A split-off is viewed as a sale for accounting purposes with a recognized gain or loss equal to the difference between the market price of the new SplitCo stock issued and ParentCo's inside basis in SplitCo's assets. Because the split-off is tax-free, provided that it meets the requirements set forth by Section 355, there is no corresponding gain or loss recognized for tax purposes.
The split-off is a tax-efficient way for ParentCo to redeem its shares. However, since split-offs require shareholders to tender their ParentCo shares to receive new shares of the subsidiary, they suffer from lower certainty of execution and are mechanically more complex relative to spin-offs. Another notable disadvantage of split-offs is the potential for shareholder lawsuits if the exchange ratio (premium) offered by ParentCo is deemed unfair by activist shareholders. On the other hand, shareholder churn may be lower for a split-off than for a spin-off because the subscription feature of a split-off better aligns shareholders' preferences with their equity holdings than does a pro rata spin-off.
An equity carve-out is typically executed ahead of a split-off to establish a public market valuation for SubCo's stock. Although the split-off can be conducted without a preceding carve-out, execution is more challenging given the difficulty in measuring the appropriate premium without an established market value for SubCo. The preceding carve-out therefore all but eliminates the possibility of shareholder lawsuits related to the premium.
Fraudulent Conveyance
When SpinCo incurs a loan and dividends the proceeds to the ParentCo, as described above, creditor claims of fraudulent conveyance may arise if SpinCo later declares bankruptcy because it is unable to service its debt. Similar creditor claims may also arise if the spin-off leaves ParentCo insolvent. Therefore, it is necessary to ensure that both SpinCo and ParentCo are adequately capitalized following the spin-off.
ITC Ltd.
ITC Ltd.
ITC Ltd. incorporated in the year 1910, is a Large Cap company (having a market cap of Rs 258,991.25 Cr.) operating in Tobacco sector.
ITC Ltd. key Products/Revenue Segments include Cigarettes which contributed Rs 30452.38 Cr to Sales Value (60.43% of Total Sales), Packaged Food Item which contributed Rs 6411.27 Cr to Sales Value (12.72% of Total Sales), Agricultural Products which contributed Rs 4097.61 Cr to Sales Value (8.13% of Total Sales), Paper & Paper Boards which contributed Rs 3149.11 Cr to Sales Value (6.24% of Total Sales), Others which contributed Rs 2617.00 Cr to Sales Value (5.19% of Total Sales), Tobacco Unmanufactured which contributed Rs 1574.46 Cr to Sales Value (3.12% of Total Sales), Service (Hotel) which contributed Rs 1173.55 Cr to Sales Value (2.32% of Total Sales), Printed Materials which contributed Rs 489.44 Cr to Sales Value (0.97% of Total Sales), Other Operating Revenue which contributed Rs 424.19 Cr to Sales Value (0.84% of Total Sales), for the year ending 31-Mar-2015.
For the quarter ended 31-Dec-2015, the company has reported a Standalone sales of Rs. 9102.66 Cr. up 3.38% from last quarter Sales of Rs. 8804.70 Cr. and up 3.44% from last year same quarter Sales of Rs. 8800.22 Cr. La compañía ha divulgado el beneficio neto después de impuestos de Rs. 2652.82 Cr. En el último trimestre.
The company’s management includes Mr. A R Noronha, Mr. Ahmed Riaz, Mr. B K Pramanick, Mr. Bagri Giriraj, Mr. Biswa Behari Chatterjee, Mr. Bose Kamal Ranjan, Mr. Chakraborty Kanchan, Mr. Dixit Pradeep Kumar, Mr. Haksar Dipak, Mr. K I Viswanathan, Mr. P Gupta, Mr. P Sen Gupta, Mr. Rajiv Tandon, Mr. S Sivakumar, Mr. Wariah Dalbir Singh, Mr. A V Girija Kumar, Mr. Anil Baijal, Mr. Arun Duggal, Mr. Krishnamoorthy Vaidyanath, Mr. Nakul Anand, Mr. Pillappakkam Bahukutumbi Ramanujam, Mr. Rajiv Tandon, Mr. Robert Earl Lerwill, Mr. Sahibzada Syed Habib-ur-Rehman, Mr. Sanjiv Puri, Mr. Shilabhadra Banerjee, Mr. Sunil Behari Mathur, Mr. Suryakant Balkrishna Mainak, Mr. Yogesh Chander Deveshwar, Ms. Meera Shankar, Mr. Biswa Behari Chatterjee.
Company has Deloitte Haskins & Sells as its auditors. As on 31-Dec-2015, the company has a total of 8,036,690,171 shares outstanding.
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The Completely Absurd (and Infuriating) Reason CEOs Get Paid So Much
John Lund—Getty Images
Options are confusing.
For years economists—not to mention everyday Americans hanging out on bar stools or on Twitter—have argued about why even mediocre CEOs get paid such ridiculous sums of money.
Of course, corporate bigwigs have always been handsomely rewarded. But in the past generation, average pay for CEOs at American’s largest companies has leaped nearly sixfold, from $2.8 million a year in 1989 to $16.3 million today, according the Economic Policy Institute. Exactly why this has happened is a matter of some debate, even among experts. Arguments range from corporate self-dealing to the just rewards for talent in a free-market system.
Now researchers from Dartmouth and the University of Chicago have examined years of pay data to offer up a new explanation. Boards have been handing CEOs bigger and bigger slugs of company stock because they don’t understand how stock options—a key component of CEO pay—work.
Options, which allow corporate executives to buy shares of their employers’ stock at preferential prices, were originally designed to constrain top executives’ pay, or at least make sure that pay is tied closely to company performance. It has long been understood that if a company’s stock rockets ahead, a rich grant of options can lead to big payday. Fair or not, that’s the way the system was engineered.
The new research shows that something different has been happening: Boards have been allowing CEO pay to climb ever higher by offering executives the same number of options year in and year out, regardless of company stock prices. The practice means that each new year’s grants tend to end up being potentially more valuable than the previous year’s, just because stock prices tend to drift higher over time.
Here is how it works: Corporate stock options (which are different from those that trade on exchanges) are typically issued “at the money.” That means they give executives the right to buy a number of the company’s shares at today’s prices, even if they appreciate in value in the near future.
The idea is that if the stock is flat or down, the CEO will make nothing. But if the value rises, he or she will be able to buy shares at what has become a discounted price. Once the options are exercised and the shares are purchased, the CEO can turn around and sell, pocketing the difference, essentially sharing in the wealth he or she created for shareholders.
The problem, according to the paper, is that boards don’t have a very strong grasp on options’ potential value, something that it typically takes a sophisticated computer algorithm (known as the Black-Scholes formula ) to analyze.
Because option values can be difficult to understand, boards have tended to issue a certain number of options from year to year, regardless of the grant’s dollar value, rather than calculate a desired dollar value and vary the number of options. But since stock prices tend to drift upward over time, this can lead to what looks in retrospect like a boneheaded move. Option grants end up being worth more and more every year—simply because an option on a share with a high nominal value is more potentially lucrative than an option on a share with a low nominal value.
Author Kelly Shue, of the University of Chicago, says boards’ apparent mistake is a common one, highlighted by years of research in the field of behavioral economics, and much like the way workers get confused about the effect of inflation on the real value of their paychecks. “It’s called ‘the money illusion,'” ella dice. “People tend to think about nominal units, not real dollars.”
To understand, consider a simple example: In the first year, a board issues a CEO options to buy 10 shares at a price of $10. The stock climbs 10%, to $11. The CEO cashes in, paying $100 for shares worth $110, and making a $10 profit.
Now imagine it is 10 years later. The market is up generally, or the company has reduced the number of shares and increased their nominal value through a reverse stock split, so that each share now trades at $20. The board, however, is still in the habit of issuing options to buy 10 shares at the market price, in this case $20. Again the stock price climbs 10%, this time to $22. Now, however, the options give the CEO the chance to buy $220 worth of stock for $200. In other words the CEO’s reward for the same 10% stock bump has doubled.
Could boards really be this knuckle-headed? The researchers collected a lot of evidence suggesting that they might. Looking at the number of options awarded by S&P 500 companies for the roughly two decades between 1992 and 2010, they found about 20% of the time boards simply kept the number of options they granted to their top executive the same from one year to the next. That might not sound like all that much. But it was by far the most common move boards made, occurring roughly four times more frequently than any other grant.
The researchers also found that when boards did vary the number of options granted to CEOs, they often picked round numbers, such as increasing the number of options by 10% or doubling it. Such behavior, the researchers argue, suggests that boards indeed tend to think about grants in terms of the number of options, not their dollar value.
There is some good news. In the past several years, it has gotten a lot harder for boards to give away the store. Starting in 2006 large companies have been required to figure out the dollar value of options—and disclose them to investors. The researchers concluded that since that time, boards appear to have become much more thoughtful about how they make grants to CEOs, and the growth rate of CEO pay has also tapered off.
But that doesn’t exactly mean boards have turned back the clock. According to the Economic Policy Institute, the typical CEO made about 58 times the average worker in 1989. By 2014 it had climbed to more than 300 times.
Incentive Stock Options and Non-Qualified Stock Options: The Basics
As compensation to employees, companies sometimes use stock options as a way to entice and maintain talented employees. Two stock options available are incentive stock options (“ISO”) and Non-Qualified Stock Options (“NSQ”). Each has important tax implications for which awareness is necessary.
Incentive Stock Options (ISO)
Incentive Stock Options are a type of stock option provided tax benefits under Internal Revenue Code sections 421 through 424. The tax benefit of ISOs is that when option is exercised, the option-holder does not pay income tax but instead would recognize long-term capital gain if the shares were held for more than one year from the date of exercise and two years form the date the options were granted. Currently, income may be taxed at higher rates than capital gain. To qualify as an ISO, the option must satisfy a number of requirements. The principal requirements are as follows: • The option price must be set at no less than fair market value of the stock on the date the option is granted to the employee. If the shareholder owns more than 10 percent of the shares then the option price must be at least 110 percent of the fair market value. • The option must be exercised within ten years from the date it was granted and five years if the shareholder owns more than 10 percent of the shares. • The plan to grant the options that includes the aggregate number of shares to be issued and the employees eligible must be approved by the shareholders within 12 months before or after the date the plan is adopted. • The option must be granted within 10 years from the date the plan was adopted • The option may only be granted to an employee, who must exercise the option while employed or within three months of termination. • At the time of grant, the employee must not own more than 10 percent of the voting power of all outstanding stock of the corporation or the corporation’s subsidiaries. Options that do not qualify as an ISO or other stock options under the Internal Revenue Code are referred to as Non-Qualified Stock Options or NSQs.
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It Has Been Two Years since UPS First Offered Part-Timers a Stock-Option Plan
It Has Been Two Years since UPS First Offered Part-Timers a Stock-Option Plan
Article excerpt
Although UPS was challenged in August 1997 regarding its part-time benefits as the November 1997 cover story, "Part-timers Make Headline News: Here's the Real HR Story," illustrates, UPS had already set up a stock-option program for part-time workers two years ago, in 1995. Below is a news release the company maintains on its Web site that outlines the program.
UPS Extends Stock Ownership to Part-time Employees
ATLANTA (Oct. 19, 1995)-UPS announced today that it is extending the opportunity to purchase UPS stock to all part-time employees with at least one year of service. The action follows the start-up on Oct. 2 of a new stock purchase program for the company's fulltime, non-management employees. Prior to that, employee ownership of stock in the privately-held UPS was limited to managers and supervisors.
"The global marketplace is changing rapidly, and it's critical to our success that everyone at UPS is ready to accept their important roles in our business," said UPS chairman and CEO Kent C. Nelson. "We appreciate the eagerness of our part-time employees to be a material part of that success."
UPS said it had intended to delay consideration of offering the stock purchase program to part-time employees until the impact of the first offering could be fully measured. ...
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Stock purchase plans
Part time employment
Postal & servicios de entrega
Employee benefits
Employee stock purchase plans
Stock purchase plans
Part time employment
Postal & servicios de entrega
Employee benefits
Employee stock purchase plans
Estados Unidos
United Parcel Service of America
Subscribe to Questia and enjoy:
Full access to this article and over 10 million more from academic journals, magazines, and newspapers
Over 83,000 books
Access to powerful writing and research tools
Article details
Asignaturas:
Stock purchase plans
Part time employment
Postal & servicios de entrega
Employee benefits
Employee stock purchase plans
Stock purchase plans
Part time employment
Postal & servicios de entrega
Employee benefits
Employee stock purchase plans
Estados Unidos
United Parcel Service of America
CRA Q&A Concerning Employee Stock Options
This Article first appeared in Tax Topics No. 2005 dated August 12, 2010.
Resolutions 23 to 31 of the 2010 federal Budget proposed changes to the rules regarding employee stock options. Legislation for these proposals has not yet been released. The CRA has posted a series of questions and answers concerning the Budget proposals for employee stock options, excerpts from which are reproduced below.
1. What are the current rules in respect of cash-out rights?
Currently, when an employee acquires securities (referred to as "shares" for purposes of the Q&As) under a stock option agreement and certain conditions are met, the employee may be entitled to deduction equal to one-half of the stock option benefit (stock option deduction). In this case, the employer cannot claim a deduction for the issuance of a security.
Employee stock option agreements can be structured in such a manner that, if employees dispose of their stock option rights to the employer for a cash payment or other in-kind benefit (cash-out payment), the employer can deduct the cash-out payment, while the employee is still eligible for the stock option deduction.
2. What are the budget proposals in respect of cash-out rights?
For transactions occurring after 4:00 p. m. Eastern Standard Time on March 4, 2010, the budget proposes that the stock option deduction will only be available in situations where either:
the employee exercises his or her options by acquiring shares of their employer; o
the employer elects in prescribed form in respect of all stock options issued or to be issued after 4:00 p. m. Eastern Standard Time on March 4, 2010, under the agreement, that neither the employer nor any person not dealing at arm's length with the employer will claim a deduction for the cash-out payment in respect of the employee's disposition of rights under the agreement; y
the employer files such an election with the Minister of National Revenue;
the employer provides the employee with evidence in writing of such an election; y
the employee files such evidence with the Minister of National Revenue with his or her Individual Income Tax and Benefit Return for the year in which the stock option deduction is claimed.
In addition, for dispositions of rights occurring after 4:00 p. m. Eastern Standard Time on March 4, 2010, the budget proposes to clarify that the stock option rules apply to an employee (or a person who does not deal at arm's length with the employee) who disposes of rights under an agreement to sell or issue shares to a person with whom the employee does not deal at arm's length.
Tax Deferral Election
3. What is the effect of the tax deferral election under the current rules?
Currently, where certain conditions are satisfied, employees of publicly-traded corporations who acquire securities pursuant to a stock option agreement may elect to defer the recognition of the stock option benefit until the year in which they dispose of the shares.
4. How does the budget proposal affect the tax deferral election?
In respect of rights under an agreement to sell or issue shares exercised after 4:00 p. m. Eastern Standard Time on March 4, 2010, the budget proposes to repeal the deferral provision.
5. Is withholding required when employees exercise their stock options?
Yes, for employees that exercise their stock options after 2010, the budget proposes to clarify that the employer will be required to withhold and remit an amount in respect of the taxable stock option benefit (net of any stock option deduction) to the same extent as if the amount of the benefit had been paid as an employee bonus.
In addition, for employee stock option benefits arising on the acquisition of shares after 2010, the budget proposes that the fact that the benefit arose from these acquisitions not be considered a basis on which the Minister of National Revenue may reduce withholding requirements.
6. Will these proposals apply if there are restrictions on the disposition of the shares acquired under the stock option agreement?
The above proposals will not apply in respect of options granted before 2011, pursuant to an agreement in writing entered into before 4:00 p. m. Eastern Standard Time on March 4, 2010, where the agreement included, at that time, a written condition that restricts the employee from disposing of the shares acquired under the agreement for a period of time after exercise.
Special Relief for Tax Deferral Elections
7. Did the budget contain any relief for employees in situations where the value of the shares acquired by them under a stock option agreement decreased significantly between the time of exercising the stock option and the disposition of the shares?
Yes, where an employee disposes of shares before 2015, and the disposition of the shares results in a stock option benefit in respect of which an election was made to defer the income recognition, the budget proposes to permit the employee to elect in prescribed form to cause the following tax treatment for the year in which the shares are disposed;
that the amount of the stock option deduction be equal to the stock option benefit (thereby eliminating the stock option benefit);
that the employee be required to include in his or her income a taxable capital gain* equal to one-half the lesser of:
the stock option benefit; o
the capital loss realized on the disposition of the optioned shares;
that the employee be required to pay a special tax equal to the proceeds of disposition from the disposition of the optioned shares (or 2/3 of the employee's proceeds of disposition, if the employee resides in Quebéc).
* The taxable capital gain will not be taken into account for purposes of the GST/HST Credit, the Canada Child Tax Benefit, the tax on Old Age Security benefits, the Refundable Medical Expense Supplement and the Working Income Tax Benefit.
Deadlines to File the Election for Special Relief
8. What are the deadlines to file an election for special relief?
The deadlines to file the election are as follows:
for shares disposed of by the employee before 2010*, the employee's filing due date for 2010; y
for shares disposed of by the employee after 2009**, the employee's filing due date for the year of the disposition.
* The election will be considered an application for determination under the Fairness provisions. This will allow the Minister of National Revenue to reassess the Income Tax and Benefit Returns of eligible employees who disposed of shares acquired under a stock option agreement in 2001 and subsequent years.
** It is important to note that this special relief is only available if an employee disposes of the shares acquired under a stock option agreement by the end of 2014.
9. When and how will I be able to make the election?
The Canada Revenue Agency (CRA) will be making the necessary changes to forms, processes and systems to give effect to this proposed change. Please note that the CRA cannot reassess to give effect to this election until the necessary legislative amendments have received Royal Assent.
100k to invest for 2 years
Long time lurker here, first time posting. I'm asking for some advice. Here goes my situation:
- 3 years ago - at age 23 i purchased my current home. Inside deal, mother died and son wanted to get rid of the home. Bought the house with my father at about 200k below value. Put about 50k in the home. The home is a 2 family. I rented out the bottom floor, and the rent covers the mortgage payment. I am paying taxes, utilities, and insurance out of pocket.
-2010 - Married. I know, some of you think that it's a bad idea, but it was the RIGHT idea for me. My wife and i make 150k between the two of us.
Ok, so here is the important part.
Expense between the two of us: $3,000 montly Take Home Pay after Taxes, 401k contributions, pensions, etc. $7,200 montly
Savings Montly: $4,200
I currently contribute 10% of my salary to my retirement account, and my current balance is around $70 thousand.
At this point, we have over $100k to invest. I'd like to invest the lump sum right now, and contribute the additional savings quarterly. We want to buy a new home in about 2 years. Selling my current home should net me about 70k (i need to split the proftis with my father, hence only the lower amount.) We'd like to buy a new home, which should cost us anywhere from $500 -600 thousand. I really want to maximize my investment. ¿Qué harías? Please let me know if you need any other info.
Amazon Salaries
'14 Feb. Software Development Engineer 1 | Full Time, India Salary . 27.5 Lakhs Salary Info . BASE: 13.5L JOINING BONUS: 4L RSU: 10L (for 4 Years) Education: B. Tech(IT) Years of Work Experience: 1.5 Previous Work Experience: Software Development Engineer 1 Other Info: - - Samsung R&D Institute India, Bangalore on 2/17/2016 | Bandera
'14 Feb. Software Engineer | Full Time, United States Salary . $130,000 Salary Info . 5K sign on, 5K relocation Education: Masters in Computer Applications Years of Work Experience: 9 Previous Work Experience: 4 yrs Microsoft contract - infactcol on 2/14/2015 | Bandera
'13 Nov. Full Time, Amazon, India Salary . 12000 Education: B. A univercity of allabad in 2000 Years of Work Experience: 7year Previous Work Experience: 5year firstflight couriars ltd. in allahabad
15month myntra. com logistics - neeraj mishra on 11/8/2014 | Bandera
'13 June SDE 1 | Full Time, India Salary . 14.5 L + 5.5L+8L Salary Info . Base - 14.5L Sign-on Bonus - 5.5L Stocks - 8L Education: BE (Hons) Computer Science BITS Pilani, Pilani campus Years of Work Experience: 1yr 9 months Previous Work Experience: I was working at the same pay in previous company at senior level. No hike when joining Amazon - anonymous123 on 6/7/2013 | Bandera
'12 Nov. Software Engineer | Full Time, United States Salary . $90,000 Salary Info . $37,000 sign on bonus over 2 years $53,000 of restricted stock units over 4 years Years of Work Experience: 0 - J on 11/18/2012 | Bandera
'12 June Software Development Engineer - 1 | Full Time, India Salary . 12L Base Salary. 2L Joining nonus for 2 years, 5.5L shares over four Years Education: MTech IIT Years of Work Experience: Fresher - Anonymous on 10/25/2012 | Bandera
'11 Nov. Softawre Development Engineer | Full Time, United States Salary . 95K Salary Info . 30k Signing bonus over 2 years,7.5K relocation,45k in stocks over 4 years Education: MSCS Years of Work Experience: 0 Previous Work Experience: 0 - Anonymous on 11/23/2011 | Bandera
'11 Oct. Software Developer Engineer | Full Time, United States Salary . 90k Salary Info . 20k signing bonus 7500 relocation 45k stock over 4 years Education: computer science degree Years of Work Experience: 0 Previous Work Experience: fresh grad - Anonymous on 10/25/2011 | Bandera
4 Lakh joining bonus over 2 years Education: NIT Years of Work Experience: 6 - Anonymous on 5/13/2012 | Bandera
Aruba Networks Inc. Salaries
'12 Aug. MTS | Full Time, India Salary . 9.6 Salary Info . 6L gross+3Lakhs Stocks+10%bonus+Perks(Bills and coupons) Education: B. E Tier 1 colleges only. Years of Work Experience: 0 Previous Work Experience: n/a Other Info: Good environment to work. party fun!! - Siddharth on 9/1/2012 | Bandera
Athena Health Salaries
'14 Dec. Ar caller | Full Time, 1 yr expirence in omega health care, Canada Salary . 30000 Education: B. E Electronics and instrumentation engneering Years of Work Experience: 4 yr expirence Previous Work Experience: 1 yr in omega health care health care as RCM(AR) caller - Madhankumar on 10/9/2015 | Bandera
'14 Dec. Ar caller | Full Time, 1 yr expirence in omega health care, Canada Salary . 30000 Education: B. E Electronics and instrumentation engneering Years of Work Experience: 1 yr expirence Previous Work Experience: 1 yr in omega health care health care as RCM(AR) caller - Madhankumar on 10/9/2015 | Bandera
'14 Dec. Ar caller | Full Time, 1 yr expirence in omega health care, Canada Salary . 30000 Education: B. E Electronics and instrumentation engneering Years of Work Experience: 4 yr expirence Previous Work Experience: 1 yr in omega health care health care as RCM(AR) caller - Madhankumar on 10/9/2015 | Bandera
'14 Dec. Ar caller | Full Time, 1 yr expirence in omega health care, Canada Salary . 30000 Education: B. E Electronics and instrumentation engneering Years of Work Experience: 4 yr expirence Previous Work Experience: 1 yr in omega health care health care as RCM(AR) caller - Madhankumar on 10/9/2015 | Bandera
Bank of America Salaries
Directi Salaries
'13 Aug. Software Engineer | Full Time, India Salary . 20.66 lakhs Salary Info . Compensation (Regular). 12 lakhs Benefit Valuation (Medical, Insurance, Meals, Gym, Relocation, Kindle, Loan Assistance, Education Sponsorship). 1.66 lakhs Sign-on Bonus. 1.5 lakhs Other bonuses: Beginning of second year. 0.75 lakhs Beginning of third year. 1.00 lakhs Beginning of fourth year. 1.75 lakhs Beginning of fifth year. 2.00 lakhs
Education: B. Tech - CS Years of Work Experience: 0 - Anonymous on 6/4/2014 | Bandera
Dynamic Digital Technologies Salaries
Ebay Salaries
EFI Salaries
eGain Communications Salaries
'13 July Soft. Engg. I | Full Time, Professional Services Organization, India Salary . 5.0 Salary Info . Fresher; CTC - 5.0; 4.88l fixed and 0.12l linked to company's performance. in-hand-p. m. 35700/- Education: B. Tech. from an NIT Years of Work Experience: 0 Previous Work Experience: none. - Anonymous on 10/17/2013 | Bandera
eight-kpc Salaries
EMC Salaries
'12 Dec. software engineer | Full Time, enterprise storage, India Salary . 9.97 lpa Salary Info . 75,000 joining bonus nothing else Education: Btech NIT+ Mtech IIT Years of Work Experience: 6 Previous Work Experience: 2 companies Other Info: my feeling is this company pays very less for people like my profile - jhandubam on 9/22/2013 | Bandera
Epic Systems Salaries
'13 Dec. Software Developer | Full Time, United States Salary . 90000 Salary Info . Relocation assistance 10k, salary increased to 95k after training Education: Master's degree Years of Work Experience: 0 Previous Work Experience: Internships - Drasingr on 12/14/2013 | Bandera
Intuit Salaries
'14 Dec. Software Development Engineer | Full Time, India Salary . 1620000 Salary Info . BASE. 1200000 BONUS. 120000 RSU. 300000( For 3 Years) PERKS. [ free breakfast+ free lunch buffet+ cab to pick you up and drop you to/from office+ if you get late at work you can order food and hire a cab, on office's tab! Gaming Zone+ Dorm Facility ] Education: B. Tech Years of Work Experience: 1.5 Previous Work Experience: Software Development Engineer - Anonymous on 12/21/2015 | Bandera
ITTI Pvt Ltd Salaries
Ittiam Systems Salaries
Ivycomptech Salaries
'10 June System Analyst | Full Time, Web application development, India Salary . 12,50,000 Salary Info . 10% annual bonus in addition based on performance Education: BTech (CSE), IIIT-Hyd Years of Work Experience: 6 Previous Work Experience: Web application developer in polaris - Naveen Reddy Mandadi on 8/20/2012 | Bandera
JDA Salaries
'12 May Associate s/w developer | Full Time, Associate s/w developer, India Salary . 5.5 Salary Info . Additional relocation+JB+Free meals and coupons Education: B. Tech/M. Tech Tier 1 institutes Years of Work Experience: Freshers Previous Work Experience: 0 Other Info: 20% minimum annual hike a must, cool environment Awesome place to start as a fresher - manish on 6/15/2012 | Bandera
JP Morgan Salaries
'14 Nov. Vice President | Full Time, SCPP, Singapore Salary . SG$155000/annum Salary Info . base salary. Education: PhD computer science Years of Work Experience: 19 Previous Work Experience: Standard Chartered, front office dev - Anonymous on 7/4/2015 | Bandera
'14 Nov. Vice President | Full Time, SCPP, Singapore Salary . SG$155000/annum Salary Info . base salary. Education: PhD computer science Years of Work Experience: 19 Previous Work Experience: Standard Chartered, front office dev - Anonymous on 7/4/2015 | Bandera
Juniper Networks Salaries
Merrill Lynch Salaries
84,000 USD as of 9/28/2012) Salary Info . 10k Signing Relocation-Business Class flight 1 month temporary accommodation Education: Computer Science Years of Work Experience: 0 Previous Work Experience: Internship only - m. haruki. yamaguchi on 9/28/2012 | Bandera
Microsoft Salaries
'14 March SE-2 | Full Time, India Salary . 40 lpa CTC Salary Info . 20 base 3 joining bonus 4 performance bonus 13 stocks over 4 years Education: BTech from a Tier-1 college Years of Work Experience: 3 Previous Work Experience: Flipkart - Johnny Boy on 7/14/2015 | Bandera
'14 March Service Engineer | Full Time, Azure Networking, United States Salary . $102,000 Salary Info . Full relo, 0-20% annual bonus, 9K stock over 3.5 years, $5000 signing. Education: Master's CS Bachelor's CE Years of Work Experience: 1 Previous Work Experience: Booz|Allen|Hamilton - ITidiot on 8/11/2015 | Bandera
'14 Feb. Software Development Engineer (L60) | Full Time, Office, India Salary . 30 Lakhs Salary Info . BASE: 16L Annual Performance Bonus: 3.2L Stocks: 685000 (for 5 Years) Joining Bonus: 4L (for 2 Years)
Education: B. Tech Years of Work Experience: 2.5 Previous Work Experience: Software Development Engineer Other Info: - - Samsung R&D Institute India, Noida on 2/17/2016 | Bandera
'14 Feb. Software Development Engineer (L60) | Full Time, Office, India Salary . 30 Lakhs Salary Info . BASE: 16L Annual Performance Bonus: 3.2L Stocks: 685000 (for 5 Years) Joining Bonus: 4L (for 2 Years)
Education: B. Tech Years of Work Experience: 2.5 Previous Work Experience: Software Development Engineer Other Info: - - Samsung R&D Institute India, Noida on 2/17/2016 | Bandera
'12 Feb. SDE | Full Time, Online Service Division, United States Salary . $100,000 Base Salary Salary Info . Signing Bonus. $5k Relocation. $15K Annual Bonus. 0-22% of base Stocks. $50k over 4 years Education: Masters in Software Engineering from NUS Years of Work Experience: 0 - Anonymous on 2/20/2013 | Bandera
Pega Salaries
'12 Nov. Senior Software engineer | Full Time, Senior Software engineer, India Salary . 15000000 Salary Info . Performance bonus. 150000 Yearly bonus. 50000 Additionals: 25000 RSUs: 100000 Education: B. Tech from IIIT Years of Work Experience: 6 Previous Work Experience: Dell, Oracle, Microsoft - Enemy 1 on 12/11/2012 | Bandera
'12 Nov. Senior Software engineer | Full Time, Senior Software engineer, India Salary . 1500000 Salary Info . Performance bonus. 150000 Yearly bonus. 50000 Additionals: 25000 RSUs: 100000 Education: B. Tech from IIIT Years of Work Experience: 6 Previous Work Experience: Dell, Oracle, Microsoft - Enemy 1 on 12/11/2012 | Bandera
Persistent Systems Salaries
Philips Salaries
'11 Aug. Software Engineer | Full Time, India Salary . 5.5 Lakhs Education: B. E in Computer Science and Engineering Years of Work Experience: Fresher Previous Work Experience: Internship @ Nokia R&D, Bangalore. - Zedstar on 1/13/2012 | Bandera
PlayDom Salaries
RoviCorp Salaries
'13 May Software Engineear | Full Time, advertiesment, India Salary . 13 LPA as base Salary Info . 1 Lakh signing + 10% bonus + 50k dscrnty bonus + ***27 lakh (50,000$)stock share*** Education: B. Tech Years of Work Experience: 2 - Mayur srivastava on 5/24/2013 | Bandera
'13 April Software Engineear | Full Time, India Salary . 11.5 lpa base Salary Info . Signing bonus 1.25 lakh, equity 1200 shares(1200*25$ = 30000$ nearly 17.8 lakh), 10% annual bonus . Education: B. Tech(IIT Kanpur) Years of Work Experience: 3 Previous Work Experience: yahoo - Abhinab on 5/27/2013 | Bandera
Sabre Holdings Salaries
Samsung Salaries
'13 Sept. Software Engineer | Full Time, SISO, India Salary . 7.75 lakhs Salary Info . Annual Base Salary = 582k Flexible Benefits = 37k Retirals = 45k Variable Bonuses = 111k Relocation Assistance and Travel Tickets (Economy Flight or 1st AC Train) Education: BE - CSE, BIT Mesra Years of Work Experience: 0 - Anonymous on 6/4/2014 | Bandera
'13 Aug. Senior Software Engineer | Full Time, Mobile Computing, India Salary . 8 lpa Salary Info . Cisco, IngersollRand, Capgemini, Naukri. com Education: B. tech, CDAC, Pursed 1 yr MS from BITS Pilani Years of Work Experience: 2.10 Previous Work Experience: Schneider Electric Other Info: Profile was for QA engg - tarun. rgec on 8/22/2013 | Bandera
50K INR Years of Work Experience: 7.5 - tripaam on 5/31/2012 | Bandera
'12 April Software Engineer | Full Time, Samsung India Software Operations, Bangalore, India Salary . 6,00,000 INR Salary Info . Project Success Incentive - 50,000 INR - 1,00,000 INR Education: B. Tech. CSE from IIIT Years of Work Experience: 0.5 Previous Work Experience: 0.5 Other Info: I am single :-) - Nitin Gupta on 5/24/2012 | Bandera
'11 Dec. Lead Engineer | Full Time, India Salary . CTC - 10.5 Lpa (excluing joining bonus) Salary Info . Joining Bonus - 1 Lpa Education: M-Tech - IIT Bmbay Years of Work Experience: 1 year 6 months - Anonymous on 1/4/2012 | Bandera
'11 Dec. Software Engineer | Full Time, samsung india software operations, India Salary . 6,00,000 Salary Info . Project related incentive. - around 50k -75k Education: Btech - cs top college india Years of Work Experience: 0.5 years - brk on 2/25/2012 | Bandera
VMWare Inc Salaries
'14 April MTS 3 | Full Time, VDI Core team r&d, India Salary . 17.64 L Base Salary Info . 12% yearly bonus assured (1.98 L) 2 L Sign On Bonus 10.30 L stocks over 4 years 25% each year Education: B. Tech Nirma University Years of Work Experience: 3.6 - Chetan on 4/3/2015 | Bandera
'11 Sept. MTS | Full Time, United States Salary . 86K base Salary Info . 5K relocation compensation, 5K signing bonus, 15K restricted stocks over 3 years Education: MS Years of Work Experience: 2 Previous Work Experience: Research assistantship - Anonymous on 9/19/2011 | Bandera
Walmart Labs Salaries
'12 Sept. Engineer III – Development | Full Time, no idea, India Salary . check below for details Salary Info . Base Salary. 1440000 PF. 69120 Performance Bonus. 288000 Equity/RSU amount. 216000 CTC. 2013120
Joining Bonus. 6 (3 first year, 3 second year) Education: B Tech Computer Science Years of Work Experience: 1 Previous Work Experience: software engineer Other Info: none - john doe on 10/19/2012 | Bandera
'12 Sept. Engineer Level 4 | Full Time, Cant Tell, India Salary . Look Below Salary Info . Base Salary. 16L Annual Bonus. 4L(25% of Base) Equity. 2.4L (15% of base) PF. 0.768L ( 4.8% of base) Gratuity. 0.3072L (1.92% of base) Joining Bonus. 7.5(first year) + 7.5(second year)
First Year CTC = 16 + 4 + 2.4 + 0.768 + 0.3072 + 7.5 = 30,97,520 Education: B Tech / M Tech both Years of Work Experience: Fresher Previous Work Experience: N/A Other Info: None - John Doe on 1/3/2013 | Bandera
First Year CTC. 18 + 4.5 + 2.7 + 0.864 + 0.3456 + 3.5 = 29,90,960 Education: B Tech Years of Work Experience: Fresher Previous Work Experience: None Other Info: None - Falaana Dhikana on 1/3/2013 | Bandera
Yahoo Salaries
'12 March Tech Lead | Full Time, India Salary . 19L base pay Salary Info . 10% base pay as annual bonus (variable pay) = 1.9L Sign-on Bonus. 6L over period of 2 yrs = 3L per year 600 stocks over period of 4 yrs = around 1.5L per year Education: M. Tech CSE from IIT Years of Work Experience: 7 Other Info: Offer Date: March 2013 - Anonymous on 3/29/2013 | Bandera
'09 Feb. Systems Engineer | Full Time, India Salary . 736000 Salary Info . Includes Stocks, Perks, etc In hand was 550000 Education: BTech Years of Work Experience: 6 month Internship at Yahoo - Anonymous on 2/24/2012 | Bandera
Yatra. com Salaries
Zoho Corporation Salaries
Zynga Salaries
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What Google’s Stock Split Means for You
No, the halving of Google Inc.’s stock price Thursday and a new ticker symbol aren’t mistakes on your screens.
Google’s long-awaited two-for-one stock split, announced nearly two years ago. has finally arrived, a development that will help cement founders Larry Page ‘s and Sergey Brin’s control over the Internet search giant.
In a stock split, a company increases the number of shares outstanding while lowering the price accordingly. In this instance, Google’s “Class “A” shares now trade under the GOOGL ticker symbol, while the newly created “Class C” shares trade under the GOOG symbol.
“By holding super-voting Class B shares, Page and Brin controlled 56% of Google as of last April’s proxy filing. The founders have seen their grip erode over the years as Google continued to issue Class A shares to finance acquisitions and pay employees with stock. Each Class A share carries one vote, while each Class B share carries 10 votes.
“To solve the problem, Google created ”Class C” shares that are being issued at the beginning of April to shareholders of record March 27. These have no voting rights and, going forward, are the shares Google intends to issue for compensation and acquisitions. That will end the slow-motion dilution for Class B shareholders.”
Google’s Class A shares recently rose 1% to $572.75 following the split.
“Say you hold 100 Class A shares today. At one vote per share, that entitles you to 100 votes. After the stock split next week, you will hold 100 Class A and 100 Class C shares. Class A shares keep their one vote, while Class C shares have none. So while your number of shares doubles to 200, you still have 100 votes. The same thing is happening for those holding super-voting Class B shares. And since it is much less likely Class A shares will be issued in the future, Brin and Page effectively put a floor under their voting control.
“One more question. Will the stock split affect the bottom line? No. Per-share earnings, as usual, will be cut in half to reflect the doubling of outstanding shares, but investors’ overall share of profits don’t change. (Twice as many shares multiplied by half the per-share earnings equals the same proportional share of profits.)”
The move comes as stock splits have largely gone by the wayside in recent years. Only 11 companies in the S&P 500 “split” their shares in 2013, the fourth-lowest number on record and down from an average of nearly 65 a year in the 1990s, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
In the past, such a move could’ve had a much bigger impact on the stock price, even though a split doesn’t fundamentally change anything about a company or its valuation. As WSJ’s Jason Zweig previously wrote, Xerox shares jumped 10% on Jan. 25, 1999, when the company said it would split two-for-one. The next day, eBay went one better with a 3-for-1 announcement that sent its stock up 37.4%.
But the muted market response to Google doubling its shares outstanding suggests investors these days appear to be acting more rationally than they did in the 1990s.
Google originally announced the split in April 2012 as a way for the founders to preserve control over the company. “We have protected Google from outside pressures and the temptation to sacrifice future opportunities to meet short-term demands,” Mr. Page wrote in a letter to shareholders two years ago, explaining the stock-split proposal.
He said that routine, stock-based compensation given to employees as well as stock-based acquisitions “will likely undermine” Google’s current ownership system. “So we want to ensure that our corporate structure can sustain these efforts and our desire to improve the world,” the letter said.
Mr. Page acknowledged that some investors—particularly those who have opposed its dual-class voting structure—won’t support the change. But he said Google’s board, which spent more than a year considering the move, decided the structure is in the best interest of the company and shareholders.
Google Splits Stock into GOOG, GOOGL
Restricted Securities
Introducción
You’ve worked hard to get where you are, making it through the lean years with the hope of a return from the stock you earned instead of a high salary or the stock you took as an early investor. Now the company has grown and prospered and you’re looking to enjoy the reward for which you’ve waited so patiently. It’s time to enjoy the comforts you’ve done without over the years. the luxury car, the dream vacation, the college education for your children, an expanded investment portfolio.
By selling your restricted securities you can begin enjoying the fruits of your labor.
Raymond James is here to help you and your financial advisor through the paperwork that may slow down the transaction process. Regulations may seem overwhelming and complicated at first, but with the help of our experts the transaction can be completed smoothly and in a timely manner.
Federal securities laws strictly govern transactions involving your restricted securities. However, if you qualify, you can sell all or a portion of these securities under Securities & Exchange Commission (SEC) Rules 144, 145 or 701, which provide exemptions from registration under the federal securities laws.
Since the rules, in terms of meaning and application, are not easily understood, this web page reviews the basics, focusing on many of the questions frequently asked by holders of restricted or control securities.
At Raymond James, our specialists are thoroughly familiar with restricted securities rules and can offer you their experience and expertise to assist in the selling and margining of your restricted or control securities.
Then, after your assets are free, your Raymond James financial advisor has a myriad of services you can utilize with your newfound wealth, such as retirement planning, trust services, estate and tax planning, asset allocation and a variety of asset managers, plus much more. It’s part of our service to help you create a comprehensive financial plan once we have completed the restricted or control securities transaction for you.
Sales of Restricted Securities
The complex conditions and procedures of Rules 144, 145 and 701 require special care and handling to ensure that securities sales are made in compliance with the law. Raymond James specialists are qualified to assist you with step-by-step service. Drawing upon the expertise of our sales, trading and operations personnel, your financial advisor will efficiently and effectively coordinate the preparation, execution and clearance of sales under the various rules. As one of the leading trading and block commitment firms in the securities business, we can bring our considerable capabilities to bear in providing proper execution at competitive prices.
Given the extensive experience of Raymond James personnel and the resources at their disposal, sellers of restricted securities can feel confident that their transactions will receive the kind of personal attention they deserve.
Rule 144
Rule 144 allows holders of restricted or control securities to sell those securities in the open market provided certain conditions are met by the seller, the broker and the company.
Restricted Securities
In general, restricted securities are acquired in a nonpublic transaction (private placement). Such securities are unregistered, can only be resold under certain conditions and usually bear a legend to that effect. Restricted securities obtained by third parties as gifts or donations, or pledged for a loan, may be sold under appropriate circumstances through Rule 144.
A Control Person/Control Securities
A control person is anyone who directly or indirectly controls the management and affairs of a company. Senior officers, directors and certain large shareholders are usually considered control persons. Whether a control relationship exists is a factual determination usually made by the company or its legal counsel.
A control person is also defined to include the following: relatives living in the same household as the control person; trusts, estates, corporations or other entities in which the control person has an interest; or trusts and estates in which the control person serves as a trustee, executor or a similar capacity. Once a company determines that an individual is deemed a control person, securities acquired by that person in any manner, including an open market purchase, are control securities.
Conditions of Rule 144 for the Sale of Restricted or Control Stock
Current Public Information
The company whose securities are being sold under the rule must have available “adequate current public information.” Generally, this requires meeting the reporting requirements of the SEC for at least 90 days before the proposed sale and filing all required reports during the 12 months preceding the sale (or such shorter period that the company has been subject to filing requirements).
Holding Period
Restricted securities must be fully paid for and beneficially owned for a period of at least one year prior to sale.
There is no required holding period for control securities that are not also restricted securities. Therefore, a control person who acquires shares through exercise of stock options, or buys stock in the open market, has no Rule 144 holding period (although he or she may be subject to short swing liability if the shares are sold within six months of acquisition or date options are granted).
Amount to be Sold
The amount of securities which may be sold under Rule 144 during any three-month period is the greater of:
1% of the class of securities outstanding or
The average weekly reported volume of trading in the securities during the four calendar weeks prior to the filing of Form 144 (Notice of Proposed Sale) with the SEC. 1
In calculating the maximum number of shares that may be sold, the seller must deduct the number of shares he or she has sold, as well as the number of shares sold within the prior three months by the following:
Relatives who share the same household
Any trust or estate in which he or she owns or such relatives collectively own 10% or more of beneficial interest or serves as trustee, executor or similar capacity
Any corporation or entity in which he or she owns or such relatives collectively own 10% or more of the beneficial interests
A party to whom he or she donated or pledged any such shares as a gift or in pledge for a loan
A party selling in concert with him or her 2
Filing of Notice Requirements
A completed original and two copies of SEC Form 144 (Notice of Proposed Sale) must be mailed to the SEC at or prior to the time of placing the sell order. If the security is exchange-traded, a copy must also be filed with the principal exchange. 3
Manner of Sale
Rule 144 sales must be made in “brokers’ transactions,” that is, in agency transactions, although they may be effected in principal transactions if the broker is a market maker or a block positioner (only if the sale is of block size) in the issue. The broker can inquire only of customers and other dealers who have recently expressed buy interest in the issue. (However, if the dealer purchases the stock as principal, the dealer may solicit buy orders.)
Intent to Sell
The seller of restricted or control securities must have a “bona fide intent to sell” the securities after the filing of the notice with the SEC. SEC rules require the shares be sold within 90 days of filing Form 144.
Exemptions from Certain Requirements 144(k)
Restricted securities may be sold under Rule 144 exempt from volume limitations, filing and manner of sale requirements if the securities have been fully paid for and beneficially owned for at least two years and the seller has not been a control person for at least three months. Estates or beneficiaries of estates that are not control persons are exempt from volume limitations, the holding period and the manner of sale requirements.
1 Calculations for volume limitations are not available for securities quoted only over the Bulletin Board.
2 Sellers acting in concert are treated as one in determining the number of shares that can be sold.
3 A seller does not have to file a notice if within any three-month period he or she sells no more than 500 shares and the aggregate sales price does not exceed $10,000; however, all other requirements of Rule 144 apply.
Rule 145
Rule 145 generally applies to securities received in connection with business combinations such as mergers, consolidations or transfers of assets (Rule 145 transactions). Unless a registration statement provides for resales, such persons must sell in accordance with Rule 144, except that there may not be a holding period or filing of notice requirement. Generally, two years after acquisition of these securities, such persons are free to resell their securities outside of Rule 145, provided they are not at the time control persons of the company.
It should be noted that persons formerly with the acquired company who become control persons of the acquiror company following a Rule 145 transaction must sell their securities subject to Rule 144, except that the one-year holding period may not apply to securities acquired in the Rule 145 transaction.
It should also be noted that when mergers and the like are not covered by Rule 145, the securities acquired are restricted and subject to all of the requirements of Rule 144, including the one-year holding period.
Rule 701
Rule 701 provides an exemption to the registration requirements of the Securities Act of 1933 for securities acquired from the issuer pursuant to certain compensatory stock benefit plans. The most common version is the employee stock option plan.
Most corporations have an S-8 registration statement in effect covering the issuance of stock from the corporation to an employee pursuant to an employee stock option plan or other type of employee benefit plan. The actions allowed under the rule are determined by whether the employee is deemed an affiliate, assuming that the S-8 registration statement is in effect.
If the person holding the securities is not deemed an affiliate of the company 90 days after the issuing company becomes subject to the reporting requirement of the Exchange Act, securities issued under Rule 701 may be sold by that person without compliance to certain Rule 144 requirements. Rule 701 bypasses the current public information, holding period, volume limitations and notice of proposed sale requirement of Rule 144 transactions.
If the person is deemed an affiliate of the company, he or she cannot freely sell the stock. Should an affiliate of the issuer sell shares pursuant to Rule 701, he or she is only exempted from the holding period requirement and must meet all other conditions of Rule 144.
Our Service to You
You will find that we offer restricted or control securities executions at competitive rates. In addition to handling all necessary paperwork, we personally follow your trade through settlement and when the trade has cleared, we can invest your funds in one of our asset management programs, or an interest-bearing account, until you are prepared to employ them.
Your restricted or control securities transaction is only the beginning. Once our professionals have helped you free up your assets, your financial advisor can help you develop a comprehensive investment plan that brings your whole financial picture into view, including personal tax and estate planning. In diversifying your portfolio after the restricted or control securities transaction, you’ll want the professional recommendations that your financial advisor offers.
The reasons for, and benefits of, facilitating restricted securities transactions are numerous. For a discussion of how you can benefit from restricted securities, contact your financial advisor or use the convenient Office Locator to find our office(s) nearest you.
Why you should avoid preferred stocks
Larry Swedroe
MoneyWatch
Apr 20, 2012 7:00 AM EDT
(MoneyWatch) The low interest rates on government and high-quality corporate debt has meant that many investors can no longer generate the kind of income they need (or were used to). Faced with this dilemma, many seek higher yielding forms of fixed income. This search often leads to preferred stock, with the 30-day yield on the iShares S&P Preferred Stock Index Fund (PFF ) about 6.45 percent as of March 30. But what (if any) role should they play in your portfolio?
Preferred stocks are technically stock investments, standing behind debt holders in the credit lineup. Preferred shareholders receive preference over common stockholders, but in the case of a bankruptcy all debt holders would be paid before preferred shareholders. And unlike with common stock shareholders, who benefit from any growth in the value of a company, the return on preferred stocks is a function of the dividend yield, which can be either fixed or floating.
Preferred stocks are either perpetual (have no maturity) or are generally long term, typically with a maturity of between 30 and 50 years. In addition, many issues with a stated maturity of 30 years include an issuer option to extend for an additional 19 years. Investors considering purchasing a perpetual preferred should ask themselves: Would I purchase a bond from the same company paying the same interest rate with a 100-year maturity? The answer should be no, because the maturity is too distant.
The very long-term maturity of preferred stocks with a stated maturity also creates a problem. The historical evidence on the risk and rewards of fixed income investing is that longer maturities have the poorest risk/reward characteristics -- the lowest return for a given level of risk. The long maturity typical of preferred stocks isn't the only problem with these securities. They typically also carry a call provision.
Call provisions
U. S. government debt has no call provision (giving the issuer the right, but not the obligation, to prepay the debt). Thus, government debt (as well as all non-callable debt instruments) has symmetric price risk. A 1 percent rise or fall in interest rates will result in approximately the same change in the price of the bond (in the opposite direction). This isn't the case with callable preferred stock:
If rates rise, the price of the preferred stock will likely fall
If rates fall, the issuer will likely call the preferred stock and replace it with a new preferred issue at a lower rate, conventional debt, or perhaps even common stock
Thus, you have asymmetric risk -- you get the risk of a long-duration product when rates rise, but the call feature puts a lid on returns if rates fall. Thus, preferred stocks rarely trade much above their issue price. It's important to note that almost all callable preferred stocks are callable at par. Thus, there's extremely limited upside (virtually none if the call date is near) potential if the security is purchased at par.
Having protection from calls is important to income-oriented investors for another reason -- callable instruments present reinvestment risk, or the risk of having to reinvest the proceeds of a called investment at lower rates. Through calls, investors lose access to relatively higher income streams. Thus, part of the incremental yield of preferred stocks relative to a non-callable debt issuance of the same company is compensation for giving the issuer the right to call in the debt should the rate environment prove favorable.
Credit quality
While not all preferred stocks are in the junk-bond category, they seldom are highly rated credits. Consider the holdings of PFF as of April 10. Only 3.2 percent were rated AAA/AA (the highest investment grades), and only about 13 percent was rated A or higher.
Why do companies issue preferred stock?
Given the lower cost of tax-deductible conventional debt (preferred stock dividends aren't deductible), one has to ask why companies issue preferred stock, especially when traditional preferred shares are rated two notches below the issuer's rating on unsecured debt. (A lower credit rating increases the cost.) The answer isn't reassuring. They may issue preferred stocks because they've already loaded their balance sheet with a large amount of debt and risk a downgrade if they piled on more. Some companies issue preferred stock for regulatory reasons. For example, regulators might limit the amount of debt a company is allowed to have outstanding.
There might also be other regulatory reasons. In October 1996, the Federal Reserve allowed U. S. bank holding companies to treat certain types of preferred stocks (what are called hybrid preferred stocks) as Tier 1 capital -- a key measure of a bank's financial strength -- for capital adequacy purposes. An additional reason for issuing preferred stock is that it can be structured to look like debt from a tax perspective and like common stock from a balance sheet perspective. Instruments structured in this manner are called trust preferred stocks.
Finally, you should be aware that preferred stock dividends are paid at the discretion of the company. Thus, preferred stock dividends could be deferred in times of financial distress -- just when you need the dividends the most. On the other hand, bond interest payments represent a contractual obligation, and failure to pay sets reorganization in motion.
There's another risk related to buying preferred stocks related to the call feature. The call feature is not only related to interest rate risk, but also to the risk of changes in the company's credit rating. A company with low-rated credit and a high-yielding preferred stock will likely call in the preferred stock if its credit status improves -- and replace the preferred stock with a now higher-rated conventional corporate bond (and its tax deductibility). Of course, if the company's credit deteriorates, they won't call the preferred stock, but the price of the preferred stock will fall due to the deteriorated credit. Again, asymmetric risk for the investor.
Investors can benefit from learning to think of things from the company's perspective. Most companies with solid credit ratings don't issue preferred stocks (except for regulatory reasons), since the dividend payments are not tax-deductible. Thus, preferred stocks are generally too expensive a form of capital for strong credits. Therefore, investors should wonder why companies would issue preferred stock paying a generous dividend when they could presumably issue debt securities with more favorable tax consequences. Investors seeking safe returns generally aren't going to like the answer.
There's another important point to cover. Longer-term maturities with fixed yields provide a hedge against deflationary environments. The problem with long-maturity preferred stocks is that the call feature negates the benefits of the longer maturity in a falling rate environment. Thus, the holder doesn't benefit from a rise in price that would occur with a non-callable fixed rate security in a falling rate environment. If the issuer is unable to call in the preferred stock, it's likely because of a deteriorating credit, putting the investor's principal at risk. Given that preferred stock issuers are generally companies with weaker credit ratings, and distressed companies are the very ones most likely to default in deflationary environments, the benefit of the high-yielding longer maturity is unlikely to be realized by the holders of these callable instruments.
Reasons to buy preferred stock
Are there any good reasons to buy a preferred stock? Corporations receive favorable tax treatment on the dividends of preferred stock, with the vast majority of the dividend not subject to taxes. U. S. corporate holders can exclude up to 70 percent of the dividend from their taxable income provided they hold the shares at least 45 days. This favorable tax treatment creates demand for the product. Individuals get no such favorable tax treatment.
Overall, investors buying preferred stocks because of the higher yield, possibly combined with the fear of common stock investing, are taking on other risks. Since the market is efficient at pricing risk, higher yields must entail greater risk (something investors were likely seeking to avoid in the first place). These risks include perpetual life (or very long maturity), a call feature, low credit standing, deferrable dividends and (for traditional preferred stocks) depressed yield due to demand from corporations that receive favorable tax treatment.
There are some other reasons to consider avoiding preferred stocks. First, because of the need to diversify the risks, one shouldn't buy individual preferred stocks. That means you need to buy a fund such as the aforementioned PFF and incur expenses of 0.48 percent. Since investors in Treasuries, government agencies or FDIC-insured CDs don't need to diversify, they can eliminate the expense of a fund altogether. Or, for convenience purposes they can use funds with much lower expense ratios (such as those offered by Vanguard). Thus, some of the higher yield the market requires for preferred stocks will be spent on implementing the strategy. The result is that investors don't earn the full risk premium the market requires. Second, if you buy individual issues, you have the trading costs, the lack of diversification and the need to constantly monitor credit ratings. Also, the typical lengthy maturity of preferred issues increases credit risk. Many companies might present modest credit risk in the near term, but their credit risk increases over time and tends to show up at the wrong time.
A study found that for the period October 2003-February 2011 period, the monthly return correlation between preferred stocks and common stocks was 0.57, demonstrating that preferred stocks have significant exposure to equity risks. You can see evidence of this in the following data. The changes in the NAV for PFF for the five quarters beginning in July 2007 (to capture the period around the latest financial crisis), were -3.8 percent, -9.2 percent, +3.3 percent, -4.1 percent, and -28.0 percent. Just when you need your fixed income assets to provide shelter from the storm, preferred stocks suffered large losses, similar to those experienced by junk bonds.
While the data is only available for a short period, it's worthwhile to consider the following evidence. The annualized return for preferred stocks was 4.7 percent, just slightly higher than the 4.1 percent return on AAA-rated bonds, and below the 6.1 percent return on stocks. Since the monthly standard deviation of preferred stocks (6.4 percent) was higher than for either AAA-rated bonds (1.1 percent) or stocks (4.4 percent), preferred stocks produced the lowest monthly Sharpe ratio -- 0.07 versus 0.09 for stocks and 0.15 for AAA-rated bonds.
Of even greater concern is that a five-factor regression shows that not only do preferred shares have significant exposure to equity risk (0.42 loading on the market factor) and significant exposure to value stocks (0.43 loading), but much greater exposure to default risk than high-yield bonds. The loading on default for preferred stocks was 1.5, as compared to the default loading for 1-10 year high-yield bonds of 0.54 and for 10-30 year high-yield bonds of 0.77. (All the figures are statistically significant.) In other words, preferred stocks had about three times the exposure to default risk as 1-10 year high-yield bonds and about twice that of 10-30 year high-yield bonds.
Finally, while fixed-rate non-callable Treasury debt makes an excellent diversifier for stock portfolios -- because a weak economy, which can harm stock prices, generally leads to falling interest rates and rising bond prices -- due to their call feature, preferred shares won't benefit as much, or even at all.
The bottom line is that preferred shares' high yields aren't sufficient to justify investing in preferred stocks. If you want or need more risk than safe fixed income investments offer, take your risks on the common stock side where you can control them more effectively, diversify them more effectively and earn the risk premium in a more tax-efficient manner. And your costs for bonds will also be lower.
&dupdo; 2012 CBS Interactive Inc. All Rights Reserved. Follow @larryswedroe
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What Is an Employee Stock Purchase Plan (ESPP) – Tax Rules
One of the most powerful benefits that any publicly traded company can offer its employees is the ability to purchase stock in itself. There are several ways this can be done, but perhaps the most straightforward method of employee stock ownership can be found in an employee stock purchase program (ESPP). These plans provide a convenient method for employees to purchase company shares and improve their cash flows or net worths over time.
Employee stock purchase plans are essentially a type of payroll deduction plan that allows employees to buy company stock without having to effect the transactions themselves. Money is automatically taken out of all participants’ paychecks on an after-tax basis every pay period, and accrues in an escrow account until it is used to buy company shares on a periodic basis, such as every six months. These plans are similar to other types of stock option plans in that they promote employee ownership of the company, but do not have many of the restrictions that come with more formal stock option arrangements. Plus, they are designed to be somewhat more liquid in nature.
Qualified vs. Non-Qualified
ESPPs can be either qualified or non-qualified. Qualified plans are more common and must adhere to the rules laid out in Section 423 of the Internal Revenue Code. However, qualified ESPPs should not be confused with qualified retirement plans that grow tax-deferred and are subject to ERISA regulations. Participants can receive the proceeds from these plans as soon as the criteria listed below are satisfied. The key characteristics of qualified ESPPs include:
The plan must be voted in by the majority of shareholders sometime during the 12 months preceding the plan’s projected start date.
The plan can only be offered to actual employees of the company (consultants and independent contractors do not qualify).
Although some categories of workers may be excluded from the plan (such as those who have worked for the company for less than one or two years), any employee who is not specifically excluded in this manner in the plan charter must be allowed the opportunity to participate in the plan.
Employees who own more than 5% of the voting stock of the company may not participate in the plan.
Equal rights are granted unconditionally to all participants.
No employee can purchase more than $25,000 worth of stock in the plan in a calendar year.
Offering periods cannot exceed 27 months in length.
Discounts on stock purchases cannot exceed 15% of the current price.
Non-qualified plans are not subject to these rules and restrictions, except that they must also be approved by the shareholders and board of directors. Like their non-qualified cousins in the retirement plan arena, such as deferred compensation or executive bonus plans, they can allow participation on a discriminatory basis. However, they also do not receive favorable tax treatment under any circumstances. A 2011 survey taken by the National Association of Stock Plan Professionals showed that 82% of companies that had an ESPP used a qualified plan, while only 24% used a non-qualified plan.
The remaining sections in this article will focus solely on qualified ESPPs except when non-qualified plans are specifically mentioned.
How ESPPs Work
Despite their differences, both qualified and non-qualified ESPPs are fundamentally similar in design. All plans consist of an offering period that begins on a specific day known as the offering date. Within the offering period there are typically several purchase periods that end in purchase dates.
For example, an offering period could start with an offering date of January 1st and then have nine purchase periods that last for three months each. The offering period would then expire at the end of 27 months. During that time, employees would elect to have a certain amount taken out of their paychecks (most employers impose a limit of about 10% of after-tax pay), which would then be used to purchase company shares on every purchase date within the offering period. Therefore, employees who participated in an entire offering period would make nine separate purchases of stock.
Each employer sets its own policy regarding its employees’ ability to withdraw funds during purchase periods and increase or decrease the level of their contributions to the plan. And while most ESPPs offer either the automatic price discount or the look-back feature (or both), there is no IRS requirement for this.
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ESPPs can provide a price advantage to employees in two different ways:
Built-in Discount . Most ESPPs give employees an automatic discount on the share price for all of their purchases, such as 10% or 15%. This creates an instant gain for all participants at the time of purchase.
Lookback Provision . This provision permits the plan to purchase the stock on the purchase date at either the closing price of the stock on the purchase date or the original offering date, whichever is lower. Obviously, this can make a huge difference in the amount of profit that employees realize from their plans. If the company stock closed at $15 on the original offering date and is trading at $40 when the market closes on the purchase date, then the plan can purchase the stock at its offering date price – or rather, at the discounted percentage of that price, if the plan offers both benefits (which is usually the case). Therefore an employee could get the stock for $12.75 in this scenario if the plan also offered a 15% built-in discount.
Some plans have more than one offering schedule running concurrently, although employees are generally excluded from participating in more than one schedule at a time.
Number of Shares Available to Participants There is also a further stipulation to the $25,000 limit on purchases; this amount is divided by the closing share price on the offering date, and the quotient then becomes the maximum number of shares that a participant can buy for that year, regardless of whether the price rises or falls afterwards.
For example, ABC Company creates an ESPP, and the stock closes at $18.42 on the offering date of January 1st. By dividing $18.42 into $25,000, it is deduced that 1,357.22 shares can be bought that year by each participant. This number is now set and cannot be changed, regardless of how the price fluctuates for the rest of the year. This computation also uses the actual market price and not the discounted price, which means that an employee in the plan could buy 1,357.22 shares at $15.66 per share if there was a 15% discount applied, thus giving the participant $21,254 worth of stock. But that would be the limit for the year, even though this is less than the $25,000 limit because the calculation does not factor in the discount.
The look-back feature can effectively reduce the value of the plan for participants when the stock price declines from the offering date, because this feature only pertains to price, not to the number of shares that can be bought. If the price of the stock declines during the year from $18.42 to $7.08, it does not allow the participants to buy more shares factoring in the lower price. Therefore, participants who wait to buy the stock when it is $7.08 can get 1,357.22 shares for only $9,609 ($7.08 x 1,357.22), but they cannot buy $25,000 worth of shares at $7.08 to get 3,531 shares for that year.
Tax Treatment of ESPPs
There are two types of stock sales that can be made from a qualified ESPP. One is a qualifying disposition, which is accorded favorable tax treatment under the tax code. The other is a disqualifying disposition, which is not.
Qualifying dispositions must meet two key criteria:
The stock must have been held at least one year from its purchase date.
The stock must have been held at least two years from its offering date.
If these conditions are met, then the discount the participant received off the purchase price is reported as ordinary income, and any excess gain between the purchase price and the sales price is considered a capital gain. Disqualifying dispositions, on the other hand, require that the spread between the closing price of the stock on the purchase date (regardless of whether or not there is a look-back period) and the purchase price, factoring in the discount, be counted as ordinary income.
A Qualifying Disposition For example, Jeremy purchased stock in his ESPP on March 23, 2012. The stock closed at $11.16 on the offering date of January 1st and $18.65 on the purchase date of June 30th. The plan gives him a 15% discount, thus giving him an actual purchase price of $9.49 (85% of $11.16 via the look-back provision).
He will have to hold his stock at least until March 24, 2014 in order for this to be a qualifying disposition. If he does this and sells the stock in April of 2014 for $22.71, then only the discounted amount of $1.67 per share ($11.16 x 15%) will be reported as ordinary income. The difference between the actual undiscounted market price and the sale price will be counted as a long-term gain or loss. Jeremy will therefore have a long-term gain of $11.55 per share ($22.71 minus $11.16).
A Disqualifying Disposition On the other hand, if Jeremy were to sell the stock before the holding period expired, he would recognize $9.16 as ordinary income ($18.65 minus the discounted purchase price of $9.49). The market price on the day of purchase ($18.65) then becomes the cost basis for the sale.
In this case, the remaining $4.06 of sale proceeds (sale price of $22.71 minus the market price on day purchase of $18.65) will then be taxed as a long or short-term capital gain, depending upon the length of his holding period. This holds true even if the stock price declines before he can sell it. If he sells the stock for $7.55, he must still recognize $9.16 as ordinary income, even though he can partially offset this with a long - or short-term capital loss of $1.94 ($9.49 minus $7.55).
Informes
Employers will usually report any ordinary income that is realized from ESPPs on the employee’s W-2 form. However, if the employer does not do this, then the employee must report it separately on Form 1040. The purchase information from ESPPs are reported on Form 3922. which is usually furnished by the employer after the purchase date. Gains and losses are reported on Form 8949 and are then carried to Schedule D.
Advantages of ESPPs
The advantages that ESPPs offer far outweigh the disadvantages in most cases. Some of the key benefits that these plans provide include:
Employee motivation and retention
Tax write-offs for employers (similar to the deductions that employers get for funding and administrating retirement plans)
Relatively cheap and simple administration
Ability to increase employee compensation that is to be partially funded by increase in the price of the company stock
No Social Security or Medicare tax withholdings for employee contributions into the plan (qualified plans only)
No requirement for employees to make complex investment decisions in most cases (although timing can be an issue)
The only real disadvantage that ESPPs can pose is that they can cause employees who participate for long periods of time and hold onto their stock to become overweighted with their company stock in their investment portfolios. This can be avoided by selling shares periodically, and reallocating the proceeds into other investment vehicles or assets.
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ESPPs can provide employees with a regular means of increasing their income over time, especially when the company’s stock is in an uptrend. ESPPs also appeal to employees because they do not require the stock that is purchased in them to be held until retirement, which allows employees to receive the proceeds from the sales of their stock on at least a semi-regular basis within a relatively short period of time, while taking advantage of long-term capital gains treatment.
For more information on employee stock purchase plans and how they work, consult your broker or human resources department.
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Mark Cussen, CFP, CMFC has 17 years of experience in the financial industry and has worked as a stock broker, financial planner, income tax preparer, insurance agent and loan officer. He is now a full-time financial author when he is not on rotation doing financial planning for the military. He has written numerous articles for several financial websites such as Investopedia and Bankaholic, and is one of the featured authors for the Money and Personal Finance section of eHow. In his spare time, Mark enjoys surfing the net, cooking, movies and tv, church activities and playing ultimate frisbee with friends. He is also an avid KU basketball fan and model train enthusiast, and is now taking classes to learn how to trade stocks and derivatives effectively.
In your disqualifying disposition example, you specify the market price on the day of purchase ($18.65) becomes the cost basis for the sale. But then at the end of the example for a declining market when calculating capital loss for the sale you use the discounted purchase price ($9.49) as the basis. Shouldn’t the capital loss be $11.10 ($18.65 minus $7.55)?
John Lau CFP, CPA
Mark, thank you for this article. Re: tax treatment – I have a different interpretation than your example: In a qualifying disposition, the optionee recognizes NO ordinary income in the year of sale if it is a qualifying disposition. Any gain o rloss is taxed as long-term capital gain or loss. But in a disqualifying disposition… IRC. Sec 422 provides that the optionee would recognize ordinary compensation income on the date of disposition to the extent of the lesser of: a. the difference between the fair market value of the shares on the date of exercise and the exercise price (i. e. $11.16-$9.49, or $1.67), and, b. the difference between the amount received in the disposition (i. e. $22.71) and the exercise price (i. e. $9.49), or $13.22. Since $1.67 is lower than $13.22, the ordinary compensation income component of the gain would be $1.67 and the balance is capital gain. Por favor comparta sus pensamientos sobre esto. Gracias.
"Wells Fargo awards company-wide stock option grants to team members for second time in two years." La Prensa de San Antonio . 2000. HighBeam Research. (March 16, 2016). https://www. highbeam. com/doc/1P1-79448906.html
"Wells Fargo awards company-wide stock option grants to team members for second time in two years." La Prensa de San Antonio . Duran Duran Industries, Inc. 2000. Retrieved March 16, 2016 from HighBeam Research: https://www. highbeam. com/doc/1P1-79448906.html
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La Prensa de San Antonio 11-12-2000 Wells Fargo awards company-wide stock option grants to team members for second time in two years
SAN FRANCISCO - Wells Fargo & Company (NYSE:WFC) said today it has awarded stock option grants to virtually all its 117,000 team members - the second company-wide stock option award in two years.
"This award recognizes the hard work and accomplishments of all our team members and the important role they play in helping Wells Fargo achieve its vision of satisfying all of our customers' financial needs," said Dick Kovacevich, president and CEO of Wells Fargo & Empresa. "In the past two years, we've successfully combined two great companies, connected the vast majority of our systems and operations, and welcomed thousands of new team members through mergers and new hires. …
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Hello, I am a college student and I would like to invest some money that I have earned during the last couple of years. I am trying to decide what exactly I should do. I was told that IRAs are good stable investments but I am really interested in the stock market. I regularly watch CNBC and keep track of some tech company stocks.
Then tonight I saw frontline for the first time and they talked about mutual funds. With so many options available, what investment "path" would be best in planning for my future?
The first step to start investing is to learn about your investment options. If there isn't a course on investing in the college you are attending, read some good books or magazines about the subject. (I wrote one that may be helpful called Everyone's Money Book . which you can get by calling 1-800-489-9929. It has loads of resources to help the beginning investor.) Once you have a sense of confidence, I would start with a mutual fund, because there you will have a professional manager looking for you. You might even start with an index fund, which buys the 500 stocks in the S+P 500 index, which often outperforms many other funds at very low cost. Once you have had some experience with funds, then branch out into individual stocks. An IRA is a tax-deferred vehicle to hold funds, stocks or bonds--in itself it is not conservative or risky--it depends on what you put into it. It is definitely a good idea to open an IRA account as soon as you have earned income, because you can have the money grow tax-deferred for many years.
Is it wise for us at 55 yrs. to have 30% of our 401K assets in an aggressive fund like 20th Century Ultra? The other 60% is split between company stock (insurance), a growth & income fund and fixed (10%,35% and 15% respectively). Gracias por su respuesta.
I think you have a pretty good asset allocation in your 401k. The Ultra fund is about the most aggressive fund out there, and it has a great long-term track record. Since you have about 10 years to retirement, it should give you the highest long-term returns, though with great volatility. If you believe in your company, it's fine to have 10% in it, though not much more than that. I don't want you to bet your career and investments on one company. The growth and income fund should give you good returns over the long run, with lower volatility. I would keep the fixed income fund exposure quite light until you are just near retirement. For the next 10 years, you want growth, not income.
Dear Sir, I noticed an article in the WSJ on a company called Cadus Pharmesuticals. The Journal suggested buying Cadus and the stock took off. It almost trippled in four days and I cant find any other reason than the article. Do favorable articles in well known publications usually have that much influence on the buying of a stock?
Edward Barbian Grants Pass, Or Barbian@cdsnet. net
Positive or negative writeups in influential newspapers or magazines definitely influence stock prices. Some of the most influential publications are the Wall Street Journal . The New York Times . Investors Business Daily . Forbes . Business Week . Fortune . MONEY . and Smart Money . On TV, Wall Street Week on PBS, CNBC and CNN all move stock prices. Investors react to news all at once when a publication or broadcast comes out, causing the enormous volatility. It will be very difficult for the average investor to react quickly enough to see news announcements to benefit from them, however, because the reaction is almost instantaneous today.
My wife and I trying to live debt free. We own two cars outright but want to keep it that way. We are setting aside $400/month for "new car savings" and plan on doing this for most of our life. Hopefully when it's time for a new car we can pay for it with cash. Basically we are "pretending" these are car payments most people are obliged to pay only we want interest to work for us not against us. Right now the money is in a money market account. Can you suggest a better way to invest this money. I'm tempted to put this in a conservative mutual fund. Unwise?
The Woodlands, TX
If you want to get a slightly higher yield without much more risk, take a look at a short-term bond mutual funds. They yield between 6% and 7%, which is more than the 4-5% of money funds, and are still quite safe. Most short term bond funds also allow you instant access to your money through check writing privileges. So when you need the money to buy the car, you can get at is without penalty.
For someone like me, who lives paycheck to paycheck, with very little money saved back but can put together $500.00 to $1000.00 in about a month with a little belt tightening, where should I start? I'm not looking to get rich overnight (but I wouldn't fight it if it happened), Just looking for a little financial security for a child's future and my wife and mine's future retirement. A small, extra monthly income wouldn't hurt either.
You should sign up for one of the automatic investment plans offered by many mutual funds who will take from $100 to $500 a month out of your checking account automatically. If you do it with a no-load mutual fund, you can do this without paying any commissions. The more automatic you save, the better the chance that it will happen. If you are relatively young (under about 45), you should put the money in a high-quality stock mutual fund because that will give you the highest return over time. Just be prepared to accept the short-term volatility of such stock funds.
As a 31 year old new father, I am particularly interested in long term growth, say 18 years when my daughter hits college age. I'm concerned that fund managers are too focused on short term results. Are there funds that are truly focused on long term growth or are us youngsters better off picking a mix of stocks on our own, relying on Valueline and other types of resources?
Jerry MacLaughlin Alexandria, VA macla@erols. com
There are plenty of good funds that concentrate on long term performance that would be good for your kid's college fund. Take a look, for example, at the 20th Century Giftrust Fund in Kansas City at (800) 345-2021. It has a great long-term track record, and it is specifically designed for funding college educations. One way you can tell if a fund is long or short term oriented is the so-called turnover ratio, which you can find in a fund's annual report. The higher the ratio, meaning, say over 50%, the more short-term oriented the fund manager is. A fund manager who only turns over 10% to 20% of his fund holdings every year is long-term oriented.
I'm 34, single, am about to inherit a small sum, and want to invest it prudently for the long term. Ordinarily I'd pore over the Morningstar, and carefully choose a few mutual funds. But I fear that I am too late into the stock market cycle to put my money into mutual funds. Am I crazy if, instead, I put my cash directly into individual stocks? What advice do you have for tracking down *undervalued* stocks? What are the key financial figures to look for? What ratios and other measures are worth focusing on?
Finally, can one use U. S. discount brokers to buy shares overseas?
Since you are single and 34, you should feel able to take the risk of stocks and mutual funds now. Just realize that they can go down as well as up. Chances are heavily in your favor, however, that stock prices will be much higher when you need the money in 30 or 40 years. You might use some good index funds as a base for your portfolio, because index funds beat many other funds and have the lowest management fees around. In picking other funds, mix up your styles so you have some growth funds, some value funds, some big-stock and some small stock and some international funds. Over time some styles will do better than others, but this way you will always be in winning style fund. I would highly recommend you get into individual stocks as well, if you can spend the time and effort to do it well. You can make or lose much more money in individual stocks because you are not as diversified as when you are in a mutual funds. As a beginner, you might want to stick to stocks where you know their product or service, instead of picking some esoteric high-tech company you don't understand. One way to get ideas is to get a free annual report of a mutual fund with the style you like and see what stocks they own. Since you are interested in "undervalued" companies, take a look at the portfolios of value stocks. They tend to look for stocks with low price earnings ratios where the stock price has recently fallen because of some bad news, but the fund manager thinks the stock will recover. On your final question, yes, U. S. discount brokers can definitely buy shares overseas. The best way to buy foreign stocks is in the form of ADRs, or American Depository Receipts, which trade on American exchanges and pay dividends in dollars.
What investments should a 32 year old investor be in if in fact we are due for a 20 to 30% correction in the market? What about corporate bonds or are their other low risk investments I should be diversified in? Specifically do you have any suggestion for money market funds or mutual funds. I am currently fairly diversified between growth funds, income funds, international funds etc. But I am concerned that all of these are primarily invested in equity.
What might you suggest?
If in fact there was 20% to 30% market correction for sure and you wanted to avoid it, you should be in money market mutual funds or short term bond funds. Right now, the highest yielding money fund is the Kiewit money fund at (800) 254-3948, which is yielding 5.41% and has $10,000 minimum. Number Two, with a 5.39% yield and a $1,000 minimum, is the Aetna Money fund at (800) 367-7732. You also might take a look at short term bond funds like the Strong Short Term Bond fund, now yielding 6.89% at (800) 368-1030. Just remember, though that no one can be sure if and when there will be a sharp market correction. Many famous analysts have been predicting it for the last two years, and they missed a rise of over 2000 points in the Dow Industrials. Instead of going to cash completely, you might take some money off the table and consider the rest of your holdings as long term investments, and just be able to ride out any downturns.
(I'm about 20 years away from retirement.) Since the market looks ready for a fall, do you recommend getting out of mutual funds which may go down with the market and get into individual stocks which have some chance of going up despite a sustained bear market? On the off chance that you'll answer a specific question, what do you think about investing in Wendy's in a dividend reinvestment program? Finally, any suggestions on where you would invest for a steady 10% per year return? ¡Gracias!
Irwin Myers Wilmette, Illinois IMM2001@aol. com
If the market does fall, stocks will go down just as much if not more than mutual funds! There are few so-called counter cyclical stocks which actually benefit if the economy goes into a recession, but they are few and far between. Some examples: prison companies like Wackenhut Corrections and Corrections Corp of America (more crime during bad times); pawn shop owners like Cash America that see boom times when people need to borrow money badly, and temporary help firms like Robert Half, Kelly Services and Olsten, as employers hire temps as they lay off full time workers. But in general, when the stock market falls, most stocks fall with it.
I am a big fan of dividend reinvestment plans, because it is a low-cost and automatic way of saving. First pick a company that you want to be in for the long term, and then enroll in their DRIP. My favorite DRIPS are discount DRIPS, where the company gives you a 5% discount on reinvested dividends. So if you reinvest $100 in dividends, they will give you $105 worth of stock. I have a list of over 100 such companies in my book, Everyone's Money Book (1-800-489-9929).
Finally don't expect a steady 10% return a year. Some years, like 1995 and 1996, will be much better than that, and some like 1994, will be worse.
I have $2500 to start with and would like to get into the stock market but don't know how to start. Should I use one of the no load, do it yourself, on line Charles Schwab type brokers or what would you recommend. I have a 403B plan at work that is in Alger Sm Cap funds and Oppenheimer growth funds, but these are very slow and with no immediate return. Also we have Kodak, Bausch & Lomb, and Xerox here in town where we can keep a close eye. Is this an advantage for investing or too close for comfort? Gracias.
George Fox Rochester New York gbfox@eznet. net
There is nothing wrong with getting started with your $2500 at a no-load mutual fund or Charles Schwab discount broker, except you will not get any personal attention. They will give you literature, but you will have to make up your own mind amongst a vast array of choices. If you spend some time at it, it can be fun and rewarding. Frankly, most brokers are not going to be very much interested in you with that small amount of money, so the discount route is probably the best way to go. As far as watching local companies like Kodak and Xerox, that can make sense, but I wouldn't rely on it too much. These are global companies, and you don't really know what is going on with their operations everywhere just because you live in Rochester and read the local paper. The idea of buying stocks of companies whose products you like, the way Peter Lynch did at Magellan, makes more sense to me.
Hi, I am a 23 year old Mech. Engineering student(3rd yr.) and want to start to learn about and invest in the stock market. But have been so overwhelmed with this and that way to "make it big" where do I go to learn the basics? ie investing 101? Also, lets say I was ready to start now. Could I start with as little as $200 and adding slowly, that is to say, what is the least amount of money one can start with. Finally, do all stock brokers get the same commission on a given trade? And (the real finally) how might I go about finding a broker?
Thanks Dan Feig
To get started investing, you can get some good books and go to free courses at local schools. I also recommend the non-profit American Association of Individual Investors, which holds classes all over the country. AAII national headquarters is in Chicago at (312) 280-0170. I have several chapters in my book ( Everyone's Money Book 1-800-489-9929) on the basics of investing in stocks, bonds, cash, mutual funds, etc. and at the end of each chapter I list extensive resources like other books, newsletters, associations, etc. to help you get educated about the market. You can get started in some mutual funds for as little as $100 a month if you sign up for an automatic investment program, taking $100 a month out of your checking account. Finally, brokers all charge different amounts of commission for each trade. Charges vary widely between full service and discount brokers, and between full service brokers. There are so-called value brokers which charge based on the value of your trade, and there are share brokers that charge a fixed amount per share. Depending on he kind of trades you make, a value or share broker may be better for you. The more actively you trade, the lower your commissions will be. For a survey on the commission rates of all the discount brokers, contact the Mercer Discount Broker Survey at (800) 582-9854.
I'm a (relatively) young individual (30) interested in investing. My wife and I have been married a year and have just bought a home. Long term security is now a reality, a necessity. A bear market doesn't sway me since I have at least thirty years before retirement (hopefully, not many more). What types of long term investments do you recommend for someone who is just starting to invest? My knowledge of the stock market is close to nill. I have been tracking some stocks, but they are technology stocks and strike me as short term, not long term winners. Also, what type of initial investment is necessary? I do not have a great deal of money to initially put into the market and am planning to invest more as time progresses. Thank you, Miles Emerson.
The key for you is to learn about investing and start putting money into stocks and mutual funds on a regular, automatic basis. It is good that you have a long-term outlook because most people that try to time the market get it wrong. You might want to start assembling a portfolio of good no-load mutual funds. One of my favorite newsletters to help you is called the No-Load Fund Investor at 800-252-2042. For the long term, go for growth stocks, which tend to go up over time in line with their rising earnings. Or you can go for growth stock mutual fund with a good record. Clearly, technology is growing area, though it is far more volatile on a short-term basis than other industries. You can get started for $100 or so if you sign up for an automatic investment plan with many mutual funds. As your income rises, increase the amount of money you set aside automatically into these funds.
I have little doubt that a large market correction will occur, but I do wonder how to profit from one. I would expect few safe investments in a real crash but what about a slow collapse. Cash, gold, other commodities which investment plays might have a decent return in a late '90's bear market? As for a crash I assume going short specific high flyers, buying puts on those stocks or just shorting the indices would be highly profitable were it not for the difficulty in being a market timer. Comments please.
Christopher Fairlie Davie, Florida Xplore4@webtv. net
There are many ways to play a market decline. Going into cash, or money market funds, is the safest, of course, because the value of your money can't decline. If you want to bet on the market decline, you could buy put options on individual stocks or on a market index like the Standard & Poor's 500, the so-called OEX contract traded on the Chicago Board Options Exchange. You might also look into long-term options called LEAPS, traded on the American Exchange, which give you two years for your bet to work out instead of 3 or 4 month as with most options. You can also sell individual stocks short, hoping to buy them back at cheaper prices and profit from the difference. Your timing has to be great, though, with these strategies. The last 6 years have not been a lot of fun for bears, short-sellers and put buyers. At some point they will be right, but you might have to withstand a lot of pain until you get there. I do not think gold would do well in a market correction either--it has been plunging for quite a while and I think will stay down because of supply and demand factors.
What is the best strategy to avoid downturns in the Market? Is it a rule to have a stop limit order on all positions? I noticed that since the market fluctuates so much, perhaps up or down as much as 10% or more in a given day, what other strategies are generally practiced? Am I a fool for not having stop limit orders to protect my investments? And how do long-term investors have stop positions. I appreciate your wealth of knowledge and insight into this matter.
Daniel Eng Delray Beach, FL daniel_eng@usa. racal. com
Putting in stop-loss orders on stocks is certainly one way to protect yourself from a market down draft. A stop loss order automatically sells your stock at a predetermined price which you set. You have to put in a particular price, not a percentage, however. So if your stock is at $30, you put it in for $25, not 20% below prevailing market price. If the stock moves up to $40, you have to tell the broker to move the stop up to $35, or whatever. It does not move up automatically. Don't put stop loss orders in too close to the market price, because chances are the stock will dip right to your stop and then take off again if you only put it, say 10% below the current price. I would say to put it in 20% to 25% below the current price--you are trying to protect yourself against disaster, not catch every last dollar of profit. Long term investors tend not to use stop orders because they don't care what is happening to their stocks on a short-term basis.
Looking for a "safe", conservative investment for IRA account. Want to go with bonds. Should I buy treasuries direct or invest in a bond mutual fund? What maturity is best at this time?
If you want a safe investment with a yield for your IRA, you could buy Treasuries directly through any bank or broker. A bond fund gives you a more widely diversified portfolio. Just realize that a bond fund never matures the way an individual bond does, so that you might never get your principal back from a bond fund if the price falls, while you can always be assured of getting your principal back when an individual bond matures. I would say the best bond maturity now would be 5-7 years, where you get the highest yield with the least risk. It is not worthwhile to get a 30-year bond, because the small amount of additional yield you get is not worth the tremendous extra risk of long-term bonds. To find the best maturity at any time, look at the "Yield Curve" chart in the Wall Street Journal every day. It compares the yields on all maturities of bonds from 3 months to 30 years, and you can pick the "sweet spot" on the chart that give you the highest yield with the least risk.
Nervous about the current state of the market, I recently shifted all of the money in my 401K. plan out of the "aggressive" portfolio and into the "conservative" money market fund. I had always been under the impression that money market funds invested in T-bills and CDs and other government-backed financial instruments, and so were essentially risk free. Recently, I read that some money market funds lost value a few years back due to investment in derivatives. Just how risk-free are these funds and, given the pressures on fund managers - even of "conservative" funds - to perform, what options do people have in trying shield the funds in their 401K plans from current market mania?
Money-market funds are not totally risk-free, but no one has ever lost money in one because the parent fund company will usually step in and make up any losses, though they are not required to do so. General purpose money funds invest in corporate securities like CDs and bankers acceptances as well as government paper like T-bills. As a result, they get higher yields than government-only money funds, which only buy direct obligations of the government. If you feel safer, buy a government-only money fund, available through most major fund companies. Just realize you will get a lower yield as a result. Most money funds do not play around with derivatives, so I wouldn't worry about that. If you want total safety, keep your money in a bank money market account, where you are insured up to $100,000 by the FDIC. Just realize that you will get an even lower yield in a bank money fund. The money funds inside 401k's tend to be very conservatively run, so I wouldn't worry about it too much.
Last night's show was eye opening. I have 90% of my net worth in an array of mutual funds through Smith Barney. Last night's show raised serious doubts in my mind about how much "diversity" I am getting in my portfolio through mutual fund investments. I've heard that for the long term, a "buy and hold" strategy is the safest way to invest in stocks, and produces an average or better return. Are there any mutuals that use this strategy? Would you recommend them as a refuge from the (rather scary) go-go mentality of the fund managers portrayed on the January 14 Frontline Show?
Michael Witmer Los Angeles, CA mgwitmer@aol. com
There are many mutual funds that buy and hold stocks longer than go-go funds shown on FRONTLINE. The way you can identify them is by their "turnover ratio", which is the percent of their portfolio that they buy and sell each year. A turnover ratio of less than 50% means they tend to buy and hold, while anything over 50% means they are far more active traders. Garrett Van Wagonner--the manager profiled in the show--might have a turnover ratio of 200% or more. Another way to protect yourself is to diversify the types of funds you are holding. If you have some value funds, some growth funds, some international funds, some small-cap funds, etc. you will weather storms better than if all your money is all in one kind of fund.
Anticipating a market downturn, we converted a stock fund into a money market fund at the end of November '96. That Fund's NAV has gone up $1.00 since we converted. We like the fund but wonder if we get hurt by returning to it at a higher price---or should we look for a fund with a NAV at or lower than the price which we converted? Gracias.
Money market funds always have their net asset value set at $1.00 and never change. So you have not experienced any gain or loss in the value of your shares. You earn interest on your money market funds instead of seeing the share price fluctuate as it does on a stock or bond mutual fund.
I have been reading that investing globally is a good way to diversify my investments. Japan and Latin America have had poor performances recently - Is this just hype by the Mutual Funds trying to sell their funds or is it really a wise move at this time?
Philip E. Pryor Boston, MA ppryor@gellerinc. com
In the long run, diversifying globally should in fact increase your return and lower your risk. So far in 1997, the Japanese stock market has tanked while the American market has soared, so it wouldn't have worked out too well lately. If you have a long-term perspective, investing in faster-growth markets like Asia and Latin America is bound to pay off, though you will experience great short-term ups and downs. I recommend you put about 20% of your portfolio in a good international fund with a solid long-term track record and don't watch it too closely because you will tend to panic when it is down and get too excited when it is up.
I haven't heard any real in depth discussion on what the effect of all the automatic pre-tax deferrals of income have had on the stock market. It seems that with most of the options available to investors' in this area, most will opt for a fund of some type, rather than low returns of the more secure investments. Is this the real fuel of the run up? How can we analyze it? Where can I find sources of information on where the money is coming from, (i. e. investors age, income, etc.)? I'm questioning when the demographics begin to change, what (or when) is the effect? Also, is there a chance that any time soon (say 5 years) that the Federal government would change the tax laws allowing a wider range of pre-tax retirement options? The example I'd like to see is using your primary residence for retirement. For example, take your current 401k savings and pay off your mortgage. (I'm sure there's lots of implications of doing this, but think how attractive it is to someone who may be forced into a less paying job due to the nature of our economy) Thank you!
Jerry Oshel joshel@injersey. com
The money flowing in from 401k plans into stocks is extremely significant in the market rise. Some analysts think it is supplying 50% or more of the money going into the stock funds now. And because it is regular--the fund managers know they are getting a new load of money every two weeks--it gives the fund managers the courage to be aggressive. There are plenty of sources of the data on the 401k phenomenon. One good central place to start is the Employee Benefit Research Institute at 2121 K Street, N. W. Washington D. C. 20037 (202) 659-0670. Another company which tracks these trends is called Access Research in Greenwich, Connecticut. The government allows companies to offer a wide array of choices now, so there really is no need to widen the choices further. It would not make sense to have people invest in their homes through a 401k since these have to be liquid securities you buy every two weeks. Many people do borrow against their 401k's to pay off debt, even though that is not a great idea since it will lower your retirement returns dramatically. It also does not make sense to pay off a mortgage with tax-deductible interest with savings that is accumulating tax-deferred.
I have a sort of complicated and unusual retirement investment strategy question. I am 65 years old and approaching retirement. Actually, I have already retired as a Cal State University professor and drawing a pension from California's Public Retirement system (CALPERS), but I am still very actively employed as a professional classical musician and due to the unusual nature of the musicians union pension fund, I am also receiving that very generous pension while still working! Both of these pension funds are quite sound and well funded(I am led to believe) but they are both heavily invested in the stock market. In the best of all worlds, I can anticipate an excellent income from these pensions in retirement, but what if the market turns south? I have a fair amount of savings in 403B accounts which are fairly defensively invested at the moment, but are at some risk. These are a form of self-insurance for my wife as we have chosen to have no life insurance and my pensions just about disappear at my death. We have gambled on my living a long time in order to maximize my pension benefits.
My question is: should I be very conservative with these 403Bs and only be in money markets or should I be more aggressive since I won't need the money for the foreseeable future if the pensions hold up and if I live? I still have 2 daughters in college which is partly why I am still working.
Any words of wisdom you can offer would be greatly appreciated.
Both the CALPERS pension and the musicians pension should be covered by the federal PBGC (Pension Benefit Guaranty Corporation). That means you are guaranteed by the PBGC to get the pension even if the stock market crashed. These are so-called defined benefit pensions, meaning they are promising you a defined benefit, come hell of high water. So don't worry about getting the money from those pensions--you will get it. You should therefore have the opposite strategy with your 403B. You should go for as much growth as possible, since that will make the difference between having a meager or great retirement lifestyle. Just realize that you are taking more short-term risk in the 403 B in order to get higher long-term returns. The other instrument you may want to look into is a variable annuity, which allows you to accumulate an unlimited amount of money in a tax-deferred account, and take it out in a tax-favored way. I have a further explanation of how annuities work and some resources to find the best ones in my book called Everyone's Money Book at 1-800-489-9929.
I am a "young" investor (26 yrs old) looking to make some short term $ from my stock (to purchase a house this year) and long term $ from my fund.
I have 100 shares in a stock that is expected to continue to rise through February. I've had it there for a year or so and have earned a decent return. Is a good idea to go ahead and tell the broker to sell at a level that the stock itself hasn't reached yet, but is expected to reach? I was told that that's ok but the broker didn't sound very enthusiastic about doing so. I don't want to miss the next time it reaches a plausible high.
I am trying to hold onto some money for the long-term (20 years). I invested 1,000 in a "socially/environmentally responsible" fund and for the first 8 or so years actually lost money on the investment. I have finally recouped my investment and have begun to make a small amount on it. Should I get out of this fund and go into another "socially/environmentally responsible" fund or something else? I have strong feelings about not putting my money into certain energy areas (oil, coal, nuclear) and HMOs.
Washington, DC 20009
There is nothing wrong in putting what is called a limit order at a particular price. With the market shooting up every day, chances are the order will go off. There are only two problems with this approach: First, you will pay capital gains tax on the profit you realize when you sell, whereas you won't pay any taxes as long as you don't sell the stock; Second, you may beat up on yourself if the stock soars further. So make yourself a promise in writing before you put in such a limit order that says, "I will not complain if the stock price rises dramatically after I have sold it"--or something to that effect.
On your second question, there are plenty of good socially responsible funds out there--there is no reason to suffer with a bad one. Each socially responsibility fund has a slightly different definition of what is responsible, however, so get one that matches your interests. I have a whole section in my Everyone's Money Book (1-800-489-9929) on socially conscious investing, and to help you out, here is a small sample of resources from that section. Franklin Research and Development (617) 423-6655 researches individual stocks for social responsibility and financial soundness. You might take a look at the Parnassus mutual fund (800) 999-3505 and the Pax World fund (800) 767-1729. A good look on the topic is The Social Investment Almanac by Peter Kinder and Steven Lyndenberg, published by Henry Holt (212) 886-9200.
I am 47, income in the lower middle class (25,000-30,000), but with savings of around $110,000 and house equity of $40,000. I would be happy with returns of 7% to 12%. I'm not a big spender, and I save as much as I can. I have no debt other than mortgage debt. Call me a throwback to The Great Depression generation! I am afraid of a prolonged bear market. Right now, I have $32,000 in a mixed mutual fund (small. medium, large caps, domestic and foreign). I am facing a decision of what to do with the balance of 66,000 of the funds I have for investing. Should I go with the safe and low return of US Savings Bonds, Treasury Bills, or even bank CDs? Or should I put some Blue Chips in the mix? My investment horizon is 10-15 years, save for $20,000 that can be gotten to without too much trouble if needed. ¡Gracias por tu ayuda!
I think you are being too conservative with your money. You can get much better returns by taking slightly more risk. For example, you might try a short-term bond fund for your $20,000 that you need immediate access to. These funds now yield about 6-7%, are very safe, and you can write a check on them to get at your money any time. Most major mutual fund companies offer them. For the $66,000, you should go for some high-quality blue chip funds that have a good track record. If in fact your investment horizon is 10-15 years, you will clearly come out better than by keeping the money in low-yielding CDs or Treasuries. Just promise yourself in advance, and preferably in writing, not to panic if the market goes down for a short time, particularly if the fall is sharp. Don't put all the money in one fund--mix it up with funds of different styles and that will lower your risk even further.
My husband(28) and I(26) have been contributing between 4 and 10 percent of our gross annual income to our 401K plans (with the majority invested in higher-risk mutual funds) for the past 4 years. We are willing to take on significant risk since we have no children as yet, so college and retirement are many years off. However, would we be wise to temporarily reinvest our current funds in low-risk, low-return bonds in anticipation of a market swing, with the intention of reentering a depressed market in a few years? Or would we be better advised to wait out the latest down-turn, letting our money ride until the next major upswing, when we will be closer to retirement age? In addition, what resources do you recommend for novice market-watchers like us whose sole investment portfolio contains a few miscellaneous stock and bond certificates, our 401Ks and IRAs, and our home? We would like to take a more active role in our investment decisions, but we have very little knowledge of investment basics. Gracias.
Aimee Koval Jurista jurista@dreamscape. com
Since you are young, you should definitely keep investing in higher-risk, higher-return choices in your 401k and ride out any downturn. Many analysts have been predicting a market fall for several years now, and look at what they have missed! Market timers are usually wrong, so it is best to ignore most of them and just keep investing regularly. If the market does fall for a short time, you will be buying more shares of good quality stocks and funds at far lower prices, so that's not too bad either! That companies your funds are investing in are growing, so over the long run, that means your investment will grow as well.
As far as resources to help you learn about all of this, (without sounding too self-serving), I think the material I have assembled could really help you. My book is called Everyone's Money Book. and it has 825 pages of explanations of all things financial, not investing, but also getting lower interest credit cards, getting cheaper insurance, college scholarship money, tax-cutting strategies and an awful lot more. I have also have done what I call the Master Your Money audio tape series, which is 6 one-hour tapes on all aspects of personal finance. I have also produced a 1 1/2 hour videotape called Getting Your Financial Act Together which I think might be helpful. There is also Everyone's Money Software, which has 36 worksheets to help you apply all of this advice to your own situation. Finally, I wrote the Dictionary of Finance and Investment Terms which defines all of the complicated language of finance in easy terms. You can find out about all of these things by calling 1-800-489-9929. (Sorry for the commercial, but you asked for help, and I really think some or all of these things might be useful, and you can return them within 30 days if you're not satisfied in any way).
What is an ideal investment strategy for this overly rated market. My age is 28 and willing to take some risk. Milwaukee, WI
Since you are 28, you should put together a diversified portfolio of mutual funds with good long-term track records. Don't worry about short-term volatility. Your biggest risk is not investing at all, not losing money in the investments your are in. Mix up the styles of the funds you are in, so some kind will always be doing well. Also make sure you invest automatically, by signing up for an automatic investment plan with a fund that will take $50 or $100 automatically out of your checking account each month. If the market falls, you will be buying more good investments at cheaper prices.
Hola. My question is how do I make up my mind? I've read the mutual fund books and understand Morningstar ratings. Frankly though I'm overwhelmed with all the information available. I'm 31, make a decent living, no family yet and have a fairly strong stomach for risk. Is there a way to simplify some of this and get started without studying every number on every prospectus?
Tim Britt Atlanta, GA flitterbic@mindspring. com
You are obsessing too much about being in the right mutual fund. The most important decision is to get started in the first place and then following through. The next most important decision is to allocate your assets correctly. Over the long term, your asset allocation is far more important than which specific stock fund you are in. At 31, you should have most of your money in stocks because you have a wonderful asset on your side--time for the investment to work out. Don't waste that asset over-analyzing every possible choice you could make. After you have looked at funds' records, expenses and styles, just go for it and don't beat up on yourself that you got the wrong fund if some other fund you were looking at goes up more than the one you picked!
I am disabled by Social Security with a terminal Leukemia diagnosis. S/S is the sole household income excepting an annuity of $116/mo. I have obtained a Viatical Settlement (advance payment of life insurance) in the amount of $38,000. What is the best choice of investment vehicle(s) to achieve the goals of survivor income and inflation-beating growth?
You should invest the viatical settlement in a short-term bond fund that will give you a yield of about 6-7%, and is still safe. You can also get at your money any time with a check. My favorite no-load short-term bond fund now is Strong Short-Term Bond Fund, now yielding 6.9%, at 1-800-368-1030. That should give you a much higher return than a savings account or CD, with a very low risk level.
In his latest book, "The Future of Capitalism," Lester Thurow says it is "certain" that the persistent US trade deficit with Japan will eventually trigger a run on the dollar and a crisis in world financial markets. Is there a way to defend against this sort of currency risk, within 401 K's limited to dollar-denominated (equity or bond) assets? Income-averaging investment is said to be "conservative," but with new global currency/derivative risks, what is the best way to try for 10-15% average gains over 5-10 years (for retirement)? Frontline show seems to say nothing is a good bet! Gracias. DO.
If anything, the dollar has been getting much stronger, not weaker, for the past two years. Japan is the country in crisis right now, not the USA. The dollar has been getting stronger despite our trade deficit with Japan and China, which is actually bigger now. If you want to hedge yourself against a dollar drop, however, buy shares in foreign companies. They are denominated in non-dollar currencies, which would rise in a value if the buck falls. An even purer play is non-dollars bonds, which you can either buy directly or through a global bond mutual fund. You can also put your money in foreign currency money market funds denominated in francs, marks, yen and pounds. I think Fidelity offers all of these, along with some other fund companies. Just realize that these money funds usually pay lower yields than American funds.
As you can tell, I don't worry about a run on the dollar the way Thurow does. My question for him would be: If investors are running from the dollar, where are they going to go? Gold, which has been in a 17-year bear market? The yen or Swiss franc, where you earn less than 1%? The mark, where the German economy is besieged by 10% unemployment? I don't think most people have much choice for safety, liquidity and high yields than the dollar today.
Based on the airing of the Frontline documentary what criteria should I look for to "interview" an investment counselor. I would like for them to look at my current investments, my expenses and my goals.
There are several different kinds of investment counselors, depending on how they get compensated. There are stock brokers who only make money on commissions when you buy or sell something. There are fee-plus-commission advisors who charge you a smaller fee but also make a commission on everything they sell you. For a list of those in your area, contact the Institute of Certified Financial Planners (1-800-282-7526). And there are fee-only planners who only charge you fees, but make nothing on whatever you buy or sell. Of course, the less a planner makes on commissions, the higher his fees have to be to make up the difference. You have to decide which system works best for you. If you might be interested in a fee-only planner in your area, you can get a free list of them from the National Association of Personal Financial Advisors (NAPFA) at 1-800-366-2732.
Hola. My name is Kevin Stanton. I am a 24 year old college student graduating this summer. Once I get a job I would like to put money in the stock market I have read Peter Lynch's book Learn to Earn and have started another book he wrote called Beating The Streets. What is some advice that you would give a beginning investor? I plan on investing for the long term. I will be putting money in on a regular basis such as bi-weekly or monthly. Also are there any computer programs that I can buy or download off the Net that will help? I would like to start researching stocks now so I will kind of know a little about stocks that I would purchase when I have money to invest. Were should I start? I am sure I will have more questions later will it be OK to send more to you. Thanks a million.
Kevin Stanton Denville NJ Stanton@chelsea. ios. com
Now is a great time for you to get started learning about investing. There are many books on the subject that might help you get started--I've got a list of them in my book Everybody's Money Book (1-800-489-9929), which also explains the basics of investing in stocks, bonds, mutual funds, etc. There is loads of material on the Net to help you learn about investing--you might just start with the Finance section of CompuServe or AOL or put in "stock market" or "money" in a Web Browser and you will have more info that you can stand. I like your idea of investing monthly or bi-weekly because that is the best way to accumulate money long-term. One fund you may want to take a look at is the no-load Stein Roe Young Investor Fund at 1-800-403-5437, which was up 36% in 1996 and also explains investing to shareholders with easy-to-read literature. You're off to a great start by wanting to learn about this stuff!
Hi, I've just graduated from college and is now job-hunting. I'm 23 this year and I plan to start investing my money in the mutual funds or stock market. I've been saving since high school and throughout my college years from part-time jobs. All my money is now in a money-market savings account at a bank. The returns from the interest rates are pretty slow and I can't wait forever. I have close to $6,000 to invest and that's my entire life savings as of now. I figured I'll have more to spare when I earn a stable income from my new job. Please advise on the best options for me right now as a head start. Gracias.
Jeff Toledo, Ohio aheng@uoft03.utoledo. edu
The money-market savings account is the worst place for your stash, because it will earn the lowest returns. Since you are 23, you can afford to take the risk, because you won't need the money for a long time. The first step is to learn about investing a bit, and then start with a good mutual fund or two, which you can easily afford with the $6000. Take a look at the previous question where I mentioned the Stein Roe Young Investor Fund. When you get the job, set up an automatic investment program so the money will go in before you can get your hands on it.
I have been learning more and more about stock options and have some money that I would be willing to risk on this type of investment. What is your opinion about options and do you have any advice before I invest. or is the risk too high. Are calls better than puts in today's market? I would appreciate any advice.
You can definitely make money in stock options but you should understand what you are doing before you start. I have a whole chapter in my book Everybody's Money Book (1-800-489-9929) which will at least give you the basics. I also list several books about options at the end of my chapter. One example: Getting Started in Options by Michael Thomsett, published by John Wiley at (212) 850-6000. You buy a call option when you expect a stock or stock index to rise and you buy a put option when you think they are going to fall. Remember that commissions can be a considerable cost when you play in options because you pay a fee whenever you buy or sell, which tends to be frequently. Also remember that time can be your friend or foe with options. If you buy a call option by paying a premium, you need the stock or index to rise before the option expires. Just rising is not enough, because if it rises after the option expires, you still lose your entire premium. In the same way, if you sell a call option, you want time to expire before the stock or index rises so you get to keep the premium without having to give anything up. You can also use options to hedge your risks of a market downfall. If you want to get serious about options, hook up with a broker who has lots of experience with them--his commissions will be worth paying.
What is the rule of thumb for cash-on-hand? (How much?)
I like to say you should have 2-3 month's earnings readily available in a liquid account like a money market fund or short-term bond fund to pay for emergencies. Some advisers talk about 6 months' wages, buy I think that is excessive and unrealistic for the average family.
I truly think that the Stock Market is overvalued and will soon correct itself. If the Stock Market becomes bearish people are going to get out and then what? Where do you think they will go? I'd like to get there ahead of the rush I'm 43 years old and am holding about $110,000 in Houston Industries stock left from an old 401K. It's done moderately well since I left HI in August and I'm unsure whether to hold on to it and get into something else. ¿Pero que? The utility industry is facing deregulation and that may negatively affect this stock BUY. in the long term, even if the electricity market is opened to anyone, the utilities still own 70-80% of all the generation capacity in the USA and will still be the major producers for the short term. Also there is talk of the PUC freezing electrical rates to allow the utilities to recoup there stranded costs. If this occurs, utilities can greatly increase their profitability but cutting costs and selling assets (they are way over employed by as much as 30-40% and own large tracts of valuable property). Should I stay put or move on?
Dwight Clement Houston, TX jnpj80a@prodigy. com
I am worried that you have too much of your assets tied up in one company's stock, in this case Houston Industries. This often happens, because the only way people save is through their employer's savings plan, and they get a large chunk of company stock as part of the deal. So I would definitely sell some of the Houston and reinvest in a more diversified portfolio of stocks, bonds and cash. You want some of your assets exposed to other industries that have nothing to do with utilities like health care, or technology. If the market falls, people would probably switch to money market funds, even though they only yield about 4-5%--at least they are safe.
I plan to retire in three years with a small pension (35k per year); I will have about 200k in an insurance company tsa. I have, by today's prices, about 150k in mutual funds; about 40% is in 20th c ultra, another 30% in 20th c select, about 15% in government bond funds, and the remaining 15% in various other mutual funds. My son thinks I should, at my time of life, shift much of my money from my more aggressive funds, particularly ultra, into bond funds, such as strong govt. ¿Cuáles son tus pensamientos?
I think you will do far better in the long term in 20th century Ultra and Select than in any government bond fund. It is really a question of volatility. If you think you might panic if Ultra plunges temporarily, and you would sell when it is way down, then sell some now. But if you pledge to yourself that you will hang in there through any rough patches, hang on. (Try writing yourself a note saying "I will not sell Ultra if the market plunges." that you can pull out when you need it.) Funds like Ultra and Select are buying companies with rapidly growing earnings, and that means that your earnings will grow as well in the long run, though the trip may not always be as smooth as it has been the last 6 years. You insurance company TSA is probably already invested in bond-type securities, so let your mutual fund do the aggressive investing for you. Just make sure you have enough income from TSA and other conservative funds to live on when you retire.
Is Intel a good buy now? Pls. advise. Gracias
Toyin Oladokun Century City, CA oladokun@ix. netcom. com
Intel has had a great rise, and had a great earnings report this week. I think it will do well over the long term because of their dominant position in chips. Just realize that the stock will be volatile in the short term.
Hello, I'm a 58 year old computer consultant who is moving the 401K funds from my former employer to my Schwab account. I'm moving about $133,000 which is currently in cash. This amount is about 70% of the total financial base my wife and I will need to count on in about six years. What's a smart investment mix, considering what's currently going on?
¡Muchas gracias!
Rich Schulthess Stone Mountain, GA rich_s@ix. netcom. com
Since you are 58, you still have plenty of time for that money to grow. Having it in money funds is the worst possible place, because you will only be getting 4-5% and have no growth potential. With $133,000, you could put together a well-diversified portfolio of stock and bond mutual funds. Don't spread yourself too thin, however. Have about $20,000 in each of six or seven total funds. This is the money you're going to be living on for the rest of your life in retirement, so you want to maximize what you've got now while you're still earning a salary. I list loads of resources to help you find some good funds in my book Everybody's Money Book (1-800-489-9929). One idea is the No-Load Fund Investor at (1-800-252-2042). Since your money is at Schwab, take a look at their Select list as well.
Please discuss the alternatives to stocks and mutual funds when a Bear market is expected. Wouldn't Bonds be best?
Gary Struthers Sausalito CA garyaiki@well. com
Bonds would not necessarily do best in a Bear market, because one of the factors that would bring on the Bear would be rising interest rates, which would hurt bonds. As boring as it may seem, the safest place to hide in a true bear market is a money market mutual fund, which keeps your principal intact and you actually benefit if interest rates rise because you earn higher yields. There are various strategies to profit from a bear market like buying put options and selling stocks short, but that is probably too risky for most people.
I just have some quick questions: The stock market works best in the long term, but what happens when your investment/stock collapses? are you "busted" and lose your investment? Where do you find these long term stocks? (i. e. IBM) are local utilities good long term investments? what exactly are "blue chip" stocks, and when/if should you sell?
Thanx Rem rja@uakron. ed
You lose your investment if you sell it at a loss. The big losers of the crash of 1929 and 1987 were the people who sold out at the bottom. You would lose if your company goes out of business, which is highly unlikely if you buy big blue chips like IBM, GM, J. P. Morgan, Proctor and Gamble, Exxon and so on that have been around forever and are extremely strong financially. No one is ever going to force you to sell--you have to have the courage to stick it out through bear markets, which may be easy to say buy difficult to do. You should sell your blue chip when you need the money, see a better investment opportunity or things are not going well at the company. Local utilities can be a good investments for the dividends they pay, and some capital gains of their earnings rise. Just realize that utilities are very sensitive to the rises and falls of interest rates--they rise when rates fall and vice versa.
how many funds are enough? I own 13 funds. I think I have good diversification. The funds I own are: new economy (American funds) new perspective growth fund of America fundamental investors euro-pacific growth ica fidelity low priced stock fidelity blue chip growth heartland value strong schafer value northeast inv trust ( h. y. bond) pbgh growth vanguard health care.
bill wagner clinton twp 105361,174@compuserve. com
You clearly have a well-diversified portfolio. 13 is plenty. What I also like about your portfolio is that is balanced between value funds like Heartland and Schafer and growth funds like New Economy, Blue Chip Growth and PBHG, along with some international funds like Euro-Pacific. If anything, you might want to add a bit to the international exposure. But overall, may I present you with a pedestal to step onto for other investors to emulate!
I have shares in a High Income fund. It has a 5 star Morningstar Rating. I was wondering in general, if there is a sharp market decline, bear market or whatever, how would this affect the valuations of the instruments most commonly held in this fund? BBB, CCC etc? I have heard these instruments referred to as "hybrid" securities. Gracias por tu tiempo. Jeff DeBernardis
A sharp stock market decline would negatively affect the value of all junk bond funds. Junk bonds are high yielding bonds that act more like stocks than bonds, and therefore are negatively affected by falling stock prices. These bonds are issued by either smaller, less mature companies, or older companies that have run into some kind of financial difficulty. If the economy goes into a recession, these kinds of companies are more vulnerable to a downturn in their business, and therefore may default on their bonds, which of course makes the value of those bonds and the funds holding them plummet. In a recession, Treasure bonds do best because no one is worried that Uncle Sam will ever default. Junk bond funds have far outperformed Treasuries so far in the 1990's because the economy has been strong and defaults have been rare. The last time junk bonds got hurt was in 1990, when the economy was in recession.
Briefly. I bought a stock at $49, it went to $59 a week later, then dropped rapidly to a low of $8. It's now back at $33. In general is it wise to sell if the stock ever gets back to what I paid for it, or is it prudent to still hold on. I'm (obviously) a novice at this sort of thing. Gracias.
Jim Buzinski Los Angeles CA alphacat@loop. com
You have yourself a very volatile stock there! Hot stocks often jump quickly right after they are issued to the public for the first time, and then fall back when the spotlight moves onto another issue. That may have happened in this case. One strategy you can use is to put in a so-called stop-loss order to sell the stock automatically when it hits a certain price. For example, you could have put in a stop at $55 which would have guaranteed you have profit--it would have gone off about a week after you bought the stock. If you still think the stock has a bright future, you can hold on for what will clearly be a wild ride. Remember there is never anything wrong with taking a profit if the stock rises back above where you bought it originally.
¡Hola! I was dismayed to learn that my former employers savings plan will only disperse my after tax/non-penalty funds to me if I rollover my total plan to another IRA. this way, they'll cut a check to me for the after tax funds (and I won't be penalized) and a check to the IRA I choose to rollover the $10,000 to. my question is. which mutual fund would best as an IRA that I'll dump the money in for 30 years? Gracias
Your employer should be able to roll over all of your account balance without penalty to a so-called rollover IRA which can set up at brokerage firm or mutual fund company. The company you roll the money into can take care of a lot of the paperwork. Just make sure the money goes directly from your company's plan to the rollover IRA. This is called an institution-to-institution transfer. If your company cuts you a check, they have to withhold 20% of your account balance and give it to the IRS--not a good idea! As far as where to invest the money, choose a good growth mutual fund with a solid long-term track record and you'll do fine. Remember to keep adding to the account as well.
Hello, I am a recent college graduate in the process of job seeking. I amassed $5000 in graduation cash and am wondering where to get my feet wet in investing. I would say that I am not afraid of risk at this point in my life (23 years old). I have been looking into the matter and quickly found myself overwhelmed with the myriad of strategies that I read about (MONEY MAGAZINE being one of my sources) Any suggestions would be greatly appreciated.
Being from MONEY, I hope you aren't too overwhelmed! The point is not to look at every potential investment possibility out there, but to pick a few ideas that can get you started. One fund I've mentioned before that is designed for young people getting started is the no-load Stein Roe Young Investors Fund at 800-403-5437. They not only had a 36% return in 1996, but they give you a lot of literature to help you understand investing. The most important thing you can do is actually make some investments and learn the process--it will soon become addicting. Don't obsess too much about whether or not you got the right fund. At your age, you should go for growth of capital--you don't need income from your investments for many years.
I don't understand the concept of "selling short". Could someone please explain this? Gracias
Selling short means that you borrow the shares of a company from your broker, and hope to buy the shares back at a lower price to replace the shares you borrowed. It is a way to profit from a stock price decline. So say you sold 100 shares of XYZ short at $50. Your broker would borrow 100 shares from another customer or the firm's inventory. If the share price fell to $40, you would "cover your short position" by buying the shares in the open market at $40. You would then replace the loan from your broker with $40 shares, and keep the $10 per share profit. If, on the other hand, the share price rose to $60, you might have to sell at a loss. This is what is know as a "short squeeze", because people who have shorted the stock can't take the pain any longer and they have to go out and buy the shares to end their suffering.
Experts keep saying the market is inflated. What criteria are they judging this by and how can we tell when it's in the right place?
Betsy Robbins Chicago, IL agnvall@aol. com
Experts say the market is inflated based on several measuring sticks they use to compare this market to all other markets in history. They talk about the price/earnings ratio of stocks, which is now about 18 on average. That means that the price of a share is 18 times the company's earnings. Historically, PE ratios have ranged from as low as 6 to as much as 20. They also look at the dividend yield of the average stock, which is now about 2%. The lower the dividend yield, the higher the stock price. The dividend yield historically has ranged from about 2% to about 6%. There are several other indicators they use, like price/book value, price/sales, etc. all of which are at the high end of their historic ranges. There is no such thing as the "right place," but there are historic averages which show that stock prices are way up there right now.
I've held some McDonald's stock for about 16 months and am somewhat disappointed in its performance. What's the common evaluation of McDonald's by the pros--short and long term?
Overland Park, KS 66210
McDonalds has been a great long-term growth stock. Recently, it has run into a slowdown because the U. S. is pretty well saturated with fast-food joints, both from Big Mac and competitors like Wendy's, Burger King, Roy Rogers, etc. Most of Bic Mac's growth is coming from overseas, which is not saturated at all. McDonalds has also tried to roll out some new products like the Arch Deluxe which have not been raving successes. So the company is clearly not he hot growth stock it used to be, buy it does have growth potential, particularly overseas.
What to do with commercial & residential property with no mortgage? Good income and little cash in bank? Property I received in inheritance. What is my best return on this?
If you think the commercial and residential property will appreciate, it might make sense to hold onto it. If you do not think real estate has much appreciation potential where it is located, I would sell it and reinvest in stocks and mutual funds with far more growth potential and more liquidity. You can also make money from the property by fixing it up and attracting a higher class of tenants who will pay higher rents. But that might take more time, money and expertise than you have. I would not take out a mortgage on the property to invest in stocks, however. That is too risky because you have to make the mortgage payments every month, and you don't know how the stocks are going to do month-to-month.
The alternatives to the stock market and mutual funds are Bonds, Banks, and Real Estate. If you are nervous about the stock market, where do you put your savings? And how will these 3 alternatives play out in a sustained bear market?
In a bear market, bonds would probably not do well because interest rates would be rising, which would hurt bond values. Real estate could be hurt depending on where it is. Real estate values are based on rental cash flow, and in a recession, rents fall. Bank CDs and money funds would be safe in a recession or bear market, as long as you stay under the insurance limits of $100,000 per account. It may be boring, but holding onto your principal and earning some interest is the best thing you can do to wait out a bear market. Then you will have cash to swoop in and grab bargains when stock prices are way down. Imagine if you had bought stocks at the depths of the 1929 or 1987 crashes how much you would be worth today!
I'm 34 with a wife and 3 children. I have a tremendous fear of the market, what can I do looking at an investment period of maybe 15 years for my kid's education and 25 to 30 years for my retirement to keep my investments safer but still beat interest rates offered by banks?
Since you are 34, your main concern should be growth of capital for your retirement and the education of your 3 kids. If you have 15 years before college tuitions, there is no question that a well-managed stock mutual funds is your best route to capital growth. It may take a hit if the market turns down for a year or two, but in the long run, it should increase your portfolio because it is investing in companies that are them selves growing rapidly. The same is true if you have 25 to 30 years until retirement. You have a wonderful asset on your side for both goals called time, which you don't want to waste. You have plenty of time for the investments to work out for you because you don't need the money right away. The people with a problem are those with tuition bills or retirement about to hit, because they don't have the time to recover if the market plunges anytime soon. As I've said in many of these other questions, don't obsess about picking the right mutual fund. Just get started and set up an automatic investment program so you have a regular amount of money going into these funds. That way, if the market falls, you will be buying more good stocks at cheaper prices. One simple, low-cost way to get started is to buy some index funds which track the markets like the Vanguard S+P 500 Index fund (800-662-7447), which was up 24% in 1996 and beat about 90% of all other funds. Don't worry too much about safety, because that is holding you back from earning high long-term rates of return!
These answers are intended as general background and information only, and not as specific instructions or advice for investing.
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10 Best Stocks for 2015
The InvestorPlace Best Stocks for 2015 features 10 stock picks from a group of money managers, market experts and financial journalists competing against each other for the best return throughout all of 2015. The year-to-date returns below will be based on market close Thursday, Dec. 31.
Throughout the year, the contributors will regularly offer updates on the good, the bad and the unexpected as it relates to their Best Stocks for 2015 pick.
Questions about the Best Stocks for 2015 picks or contributors on the list? Email us at editor@investorplace. com or engage in the conversation on Twitter using hashtag #beststocks .
Google Inc (GOOG)
Buy Price: $ 526.40
Ending Price: $ 758.88
Ambarella Inc (AMBA)
Buy Price: $ 50.72
Ending Price: $ 55.74
ABM Industries, Inc. (ABM)
Buy Price: $ 28.04
Ending Price: $ 28.30
Buy Price: $ 108.53
Ending Price: $ 105.26
Prospect Capital Corporation (PSEC)
Ending Price: $ 6.98
Rave Restaurant Group (RAVE)
Ending Price: $ 6.39
Old Dominion Freight Line (ODFL)
Buy Price: $ 77.64
Ending Price: $ 59.07
iShares Dow Jones US Oil Equip. ETF (IEZ)
Buy Price: $ 48.97
Ending Price: $ 35.78
Buy Price: $ 15.21
Ending Price: $ 10.55
Buy Price: $ 50.51
Ending Price: $ 33.26
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Members of my organization already have individual Creative Cloud memberships. Can I switch them to Creative Cloud for teams? Members of my organization already have individual Creative Cloud memberships. Can I switch them to Creative Cloud for teams?
Yes, individual Creative Cloud members can upgrade to Creative Cloud for teams with no cancellation fee. To do so, please call Customer Care for support. Be prepared to provide:
Adobe ID for the primary admin of the teams membership
Phone number for the primary admin
Adobe IDs for the individual memberships you want to switch to the teams membership
Alternatively, if you invite someone in your organization to join Creative Cloud for teams, and they already have an individual membership, all they need to do is accept their Creative Cloud for teams invitation (using their Adobe ID). They will automatically be prompted to cancel their individual membership.
My organization wants to block access to certain services, such as storage and community features, available through Creative Cloud. es posible? My organization wants to block access to certain services, such as storage and community features, available through Creative Cloud. es posible?
Yes, your IT administrators can block users from accessing the online services. The online services and their URLs are listed here .
As an administrator, you will also be able to deploy Creative Cloud desktop applications independent of the cloud-based services using the Creative Cloud Packager. The Creative Cloud Packager is available through Creative Cloud for teams.
Can I block my users from using Creative Cloud for teams storage? Can I block my users from using Creative Cloud for teams storage?
There is no way to centrally disable access to Creative Cloud storage. Any end users who have access to the web via a browser have the ability to store their files in the cloud. However, if users are on a corporate network and using company-administered machines, the following network calls can be blocked via the organization's firewall, thereby blocking use of storage while on the network:
https://creative. adobe. com/api/assetso
https://creative. adobe. com/api/collectionso
https://creative. adobe. com/api/shareo
https://creative. adobe. com/files — port 443
Note: The services blocked on the website may be accessible via other endpoints not related to the site, and the site may be the only access point for services that should not be blocked. The full list of online services and their URLs are listed here .
What is the difference between the individual, team and enterprise plans? What is the difference between the individual, team and enterprise plans?
Click here for a product comparison chart.
What’s the difference between Creative Cloud for teams complete and single app? What’s the difference between Creative Cloud for teams complete and single app?
There are two Creative Cloud for teams plans: a complete plan (all Creative Cloud apps and services) or a single-app plan (access to one app, such as Photoshop CC, and select services).
Does Adobe offer Creative Cloud for teams volume discounting? Does Adobe offer Creative Cloud for teams volume discounting?
Customers who purchase through resellers or via Adobe’s telesales agents must do so through the Value Incentive Plan (VIP), Adobe’s subscription licensing program. A transactional discount is available for purchases of 50+ licenses. VIP’s loyalty program, VIP Select, offers volume discounts for members that purchase a minimum of 250 licenses. Once VIP Select status is achieved, Members qualify for benefits including VIP Select Level Discounting and much more. Please contact your Adobe rep or reseller partner for information.
Which Creative Cloud desktop apps are available as a single app? Which Creative Cloud desktop apps are available as a single app?
The following are available as a single app: Photoshop CC, Illustrator CC, InDesign CC, Adobe Muse CC, Dreamweaver CC, Flash Professional CC, Edge Inspect CC, Edge Animate CC, Adobe Premiere Pro CC, After Effects CC, Adobe Audition CC, SpeedGrade CC, InCopy CC, and Prelude CC. Although membership includes access to just one app, you will also have access to all other CC apps as a free 30-day trial.
Creative Cloud for teams isn’t available in my country. When will it be available? Creative Cloud for teams isn’t available in my country. When will it be available?
We intend to make Creative Cloud as widely available as possible. See the latest list of countries where Creative Cloud for teams is available.
Do I have to be connected to the Internet to use my desktop apps? Do I have to be connected to the Internet to use my desktop apps?
No. You only need to connect to the Internet at least once every 99 days to validate your membership.
Can I buy Creative Cloud for teams through my reseller? Can I buy Creative Cloud for teams through my reseller?
Yes, click here to find an Adobe-authorized reseller. Creative Cloud for teamsis also sold directly through Adobe. Click here to purchase.
Lo esencial
Chapter 2: The Objective in Corporate Finance
CT 2.1: Al (Chainsaw) Dunlap, who as chief executive officer at Scott Paper, was responsible for turning the company around and making millions for stockholders, has argued that CEOs of firms should focus solely on maximizing stock prices, and that the actions that they take in the process enrich society as well. Under what conditions would his argument hold? Under what conditions might it break down?
Answer . For this argument to hold, markets would have to be efficient and the potential for social costs (from firms maximizing stock prices) limited. In addition, bondholders would need to be protected.
CT 2.2: Many of the problems that we have noted with stock price maximization in this chapter arise from the different objectives of stockholders, lenders, managers and society. One mechanism that can help balance the competing interests is the legal mechanism - firms can be sued for creating social costs, investors can sue firms that reveal misleading information, lenders can sue if they feel that they have been unfairly victimized and stockholders can sue managers for breach of fiduciary responsibility. How effective will this legal mechanism be at reducing problems? What are its costs?
Answer . the legal mechanism can be partially effective, but not completely for two reasons. One is that the legal process is both lengthy and occurs after the fact. Lawsuits can make tobacco companies pay, but they cannot make lung cancer go away. The second is that there are tremendous side costs to the legal process. Firms that create no social costs can be targeted by lawyers, and even if they win, may incur large expenses.
CT 2.3: Assume that you a have been hired to run a not-for-profit organization. Do you still need an objective? How would you come up with an objective, and put it into practice in decision-making in the organization?
Answer . Every organization needs a dominant objective. For a non-profit, the objective may be stated in terms of the service it plans to provide, and the costs can be a constraint. Thus, the objective for a hospital might be to deliver quality health care to a specified population at the lowest cost - quality would have to be defined for this objective to have teeth. Once the objective is specified, the organization would use it to decide how to allocate resources and to choose between alternatives.
CT 2.4: Assume that you have been appointed economic czar of an emerging market economy. You would like to create the conditions needed for managers of firms in the economy to focus on maximizing stock prices. What are some of the actions you would take to facilitate this transition?
Answer: There are several actions that I would take. The first is to create a fair financial market, where insiders do not have a clear advantage over other investors. To allow for this fairness, I would require firms to reveal information about themselves to financial markets on a regular basis. The perception of fairness is critical for markets to be well functioning and liquid. Second, I would eliminate any laws or taxes that are designed to discourage trading. Third, I would work on increasing the power stockholders have over publicly traded firms.
CT 2.5: In recent years, there are some who have argued that firms should maximize stakeholder wealth, rather than stockholder wealth, where stakeholders include stockholders, bondholders, employees and society. What are the advantages and disadvantages of this alternative objective function? How would you put this objective function into practice?
Answer . The advantage of the stakeholder approach is that it can lead to more balance in decisions and potentially leave them better off, at least collectively. The disadvantage is that the approach leads to a division of responsibility and to buck-passing by managers. To put this objective into practice, you would need to specify the objectives for each group (employees, society, stockholders, bondholders, customers) in clear and quantitative terms, and specify a mechanism for weighting the different (and sometimes competing) objectives.
Chapter 3: The Time Value of Money
CT 3.1: Economists and government officials have been wringing their hands over the desire for current consumption that has led American families to save less and consume more of their income. What are the implications for discount rates?
Answer: Consuming more and saving less, as a society, leads to higher real interest rates, which increases nominal interest rates. Other things remaining equal, such societies will under invest for the future.
CT 3.2: Assume that you are comparing interest rates on several loans, with different approaches to computing interest. The first loan has a stated interest rate of 8%, with compounding occurring every month. The second loan has a stated interest rate of 7.8%, with compounding occurring every week. The third loan has a stated interest rate of 7.5%, with continuous compounding. Which is the cheapest loan?
Answer: You would need to make the three rates comparable.
Interest rate on first loan = (1 + .08/12) 12 - 1= 8.30%
Interest rate on second loan = (1 + .078/52) 52 - 1 = 8.11%
Interest rate on third loan = exp .075 -1 = 7.79%
The third loan is the cheapest.
CT 3.3: Assume that you have a cash flow that is expected to grow at different rates each year over time, but the average growth rate forever is 5%. Can you use the growing perpetutity formula? ¿Por qué o por qué no?
Answer: Yes. It will be an approximation, but it will be pretty close to the true value, since the cash flows occur forever.
Chapter 4: Understanding Financial Statements
CT 4.1: Financial statements are prepared once every three months at most firms in the United States. Which of the three statements - the income statement, the balance sheet or the statement of cash flows - is likely to show the least change from period to period?
Answer: The balance sheet is likely to show the least change from period to period because it reflects the cumulated effects of all actions taken by a firm over its lifetime. The income statement and the statement of cash flows are likely to be much more volatile since they reflect a firm's operations only during the period.
CT 4.2: The distinction between assets in place and growth assets is a key component of financial analysis. Why is this distinction important?
Answer: For several reasons. The first is that assets in place generate cash flows currently and reflect investments already made. Growth assets reflect investments yet to be made, and thus do not generate cash flows today. The second is that the two might have very different risk profiles, and thus need to be judged differently. The third is that the type of financing used can be very different for the two groups of assets - equity is the choice for growth assets, while debt and equity may finance assets-in-place.
CT 4.3: Given current accounting standards, what types of firms will see the values of their assets understated and why?
Answer: Firms with substantial research and development (technology firms and pharmaceuticals) and firms with substantial operating leases (specialty retailers) will have understated assets. R&D expenses and operating lease expenses are treated as operating expenses and not capitalized.
CT 4.4: Sports teams often enter into multi-year contracts with their star players. These contracts usually involve the commitment to make large payments over several years to the players, with no escape clauses. How would you treat these commitments in computing how much these sports teams owe?
Answer: I would take the present value of these commitments and treat them as debt, if the sports team has little or no flexibility on the payments contractually agreed to.
CT 4.5: A high-technology firm announces a large increase in profits, largely as a consequence of cutting back on R&D expenses. Is the firm more profitable? ¿Por qué o por qué no?
Answer: This firm may report higher net income and earnings per share, but it is not more profitable, from a financial standpoint. It has cut back on capital expenses (which are designed to generate growth in the future) and has not really generated additional income from its existing investments.
CT 4.6: What accounting ratios would you use, and how would you use them, to measure a firm’s exposure to equity risk (as opposed to default risk)?
Answer: One ratio would be the price to book value ratio. The higher this ratio, the more of its value a firm gets from its growth assets, and thus the more equity risk it should have. The most useful accounting ratios are likely to be comparisons over time. For instance, the variance in net income or earnings per share over several years or quarters is likely to be correlated with equity risk.
CT 4.7: As an investor in stocks, why might you want uniform accounting standards in different markets? What are some of the features you would like to have these uniform accounting standards to have?
Answer: You might want to choose between investments traded in different markets, and compare them on their profitability or leverage. You would want these uniform standards to measure profits fairly, enforce the distinction between operating and capital expenses, and reveal the existing assets of the firm. You would also want these standards to show all of the outstanding liabilities of the firm.
Chapter 5: Value and Price
CT 5.1: The duration of a bond generally increases as the maturity of the bond increases. Estimate the duration of a perpetual bond.
Answer: The duration of a perpetual bond is approximately the inverse of its coupon yield. Thus, the duration of a 10% console bond is approximately 10 years. With a 5% console, it becomes 20 years.
CT 5.2: A significant portion of the value of the store comes from the estimated value of the land at the end of the store’s life. If the Home Depot had leased the store rather than buying it, the land would have reverted back to the lessor at the end of the store’s life. Does this imply that the net present value of the store will decline if the store is leased?
Answer: No. It depends upon what the lease payments are and how they reflect the value of the real estate component.
CT 5.3: Assume that you value equity by discounting free cash flows to equity at the cost of equity. If you revalue the firm, using free cash flows to the firm and the cost of capital, and then subtract out the outstanding debt, would you get the same value for the equity? Should you?
Answer: Yes, if the debt to capital ratios that you use are the same in both analysis, and both debt and equity are fairly priced. If not, you can get different answers.
CT 5.4: With a conventional asset, the value of the asset decreases as the riskiness of the asset increases. With a contingent claim asset or option, the value of the option increases as the riskiness of the asset increases. Explain the reason for the difference.
Answer: With options, you are protected from losses on the downside. Hence, you gain from the upside generated by volatility, without being affected by the downside.
CT 5.5: The efficiency of a market can be measured by the speed and accuracy of the price response to new information or by whether some investors can consistently earn higher returns than the rest of the market. Is there a link between the two measures? Which is the stronger test?
Answer: Yes. If markets did not respond quickly and accurately to new information, investors can trade after new information releases and generate excess returns for themselves. The first (market response to information) is the stronger test, since it is possible for markets to be inefficient in responding to information but to be efficient in terms of not letting investors earn excess returns (because of transactions costs or other trading impediments). It is much more difficult to visualize a scenario where investors make excess returns in a market that is efficiently reacting to new information.
Chapter 6: The Basics of Risk
CT 6.1: When we argue that higher risk should be compensated for with a higher expected return, are we assuming that all investors are risk averse? Would this argument still hold if all investors were risk neutral?
Answer . We are assuming that investors are risk averse, on average, and not that all investors are risk averse. If all investors were risk neutral, there would be no need for a higher expected return on risky investments.
CT 6.2: Bill Gates is the largest stockholder in Microsoft. Given our definition of the marginal investor (the investor most likely to be involved in the next trade as a buyer or seller), would Bill Gates also be the marginal investor in Microsoft? ¿Por qué o por qué no?
Answer . While Mr. Gates is the largest investor in Microsoft, he does not trade in his stock frequently. Consequently, it is unlikely that he is the marginal investor in the stock. (A large institutional investor is more likely to be the marginal investor in the stock)
CT 6.3: All risk and return models in finance consider only that portion of risk that cannot be diversified away as risk that will be rewarded with a higher expected return. Why do the capital asset pricing model, the arbitrage pricing model and the multi-factor model measure this risk differently?
Answer . Because they make different assumptions about the nature of market risk. The CAPM assumes that marginal investors will hold the market portfolio, and that all market risk can therefore be measured by the relationship of individual investments to the market portfolio (one beta). The arbitrage pricing and multi-factor models allow for multiple sources of market risk, and measure an investment's risk relative to each source.
CT 6.4: Assuming that you have the right model for risk and return, would you expect the actual returns on individual investments in any period to be equal to the expected returns? ¿Por qué o por qué no?
Answer: No. The essence of risk is that the actual returns can deviate from the expected returns. If the actual returns on an investment were always equal to the expected returns, it would be a riskless investment.
CT 6.5: Why, with bonds, do we not measure risk using betas? Can you think of any types of bonds, whose risk you would measure using betas?
Answer: Bonds have limited upside potential and large downside potential. The use of variance (and betas) is built on the presumption of symmetric distributions - potential upside as well as downside - and this does not hold for bonds. Instead, we look at just the downside risk (default risk) when we look at bonds.
Chapter 7: The Basics of Risk
CT 7.1: As long as firms are growing rapidly, they do not need to know their costs of equity or capital. Is this statement true? ¿Por qué o por qué no?
Answer: This statement is not true. Even as firms grow rapidly, they are making new investments. Firms need to know their costs of financing in order to determine whether these investments are good investments.
CT 7.2: If private businesses have higher costs of equity than otherwise similar publicly traded businesses, what are the implications for competition between the two? How can a private business survive this competition?
Answer: Private businesses start off with a disadvantage. They cannot accept investments that otherwise similar publicly traded firms can. To survive, a private business has to generate higher cash flows (perhaps private owners work harder than managers of publicly traded firms) from the same investments.
CT 7.3: Can the cost of debt be higher than the cost of equity? If yes, when might this happen? If not, does it follow that the cost of capital will always decrease as a firm borrows more?
Answer: While we can think of a really convoluted example where this is possible (negative beta equity, high default risk debt), it will almost never occur. Debt investors have prior claims on cash flows, both in operations and in bankruptcy, and should thus demand lower returns, on an expected basis, than equity investors in a firm. It does not follow that the cost of capital will decrease as we take on more debt, because increasing leverage increases the costs of both debt and equity.
Chapter 8: Estimating Hurdle Rates for Projects
CT 8.1: Defined broadly, everything that a firm does can be categorized as a project. Would you expect the same decision rules to apply to all projects? ¿Por qué o por qué no?
Answer: While projects can vary a great deal in scale and characteristics, the objective of the firm is the same - to maximize firm value. Consequently, I would expect the same decision rules to work on all types of projects.
CT 8.2: Assume that you apply the firm's hurdle rates to all investments considered by a firm. What will happen to the risk profile of the firm over time? ¿Por qué?
Answer: Over time, the firm will over invest in risky projects and under invest in safe ones. Consequently, it will become riskier.
CT 8.3: When a firm has businesses with very different risk profiles, different investments can have very different costs of equity and capital. What is the relationship between the firm's cost of equity and capital and its projects' costs of equity and capital?
Answer: The firm's costs of equity and capital should reflect the weighted average of the costs of equity and capital of all of the different businesses that the firm operates in, with the weights depending upon the contribution they make to firm value.
CT 8.4: Under what conditions might the cost of debt for a project be lower than the cost of debt for the firm considering the project?
Answer: If the project is a stand-alone project with high and stable cash flows, it can have a cost of debt that is lower than that of the parent firm. (To obtain this cost of debt, though, the project's cash flows and assets will have to be used to back up the project's debt rather than the firm's debt.)
CT 8.5: Assume that you are estimating the cost of capital for a project, and that you use the financing mix used for the project to estimate the cost of capital. When is this appropriate and when is it not?
Answer: If the project carries its own debt and has risk characteristics that are very different from that of the rest of the firm, you would use the project's financing mix to compute the cost of capital. It is not appropriate to do so, if the project does not carry its own debt or has risk characteristics similar to that of the rest of the firm.
CT 8.6: Assume that you are looking at an investment analysis of a project. The project analyst has used a high discount rate, to reflect the riskiness of the project. She has also used conservative (low) estimates of the cash flows, because of the riskiness of the project. Is there a problem with the project analysis? Explique.
Answer: There is a problem with this analysis. The risk has been counted twice - once by using a high discount rate, and once when the cash flows were made conservative (below expected values)
CT 8.7: Assume that managers routinely consider diversifiable risk in making their investment decisions. Will the firm invest too much, or too little, or could either occur?
Answer: The firm will invest too little, since all risk will be considered in project analysis, rather than just non-diversifiable risk. If projects are being compared for selection, this process will be biased against investments with substantial diversifiable risk and towards investments with substantial market risk.
Chapter 9: Estimating Earnings and Cashflows for Projects
CT 9.1: What are some of the factors you would consider in deciding whether to use historical data, market testing or scenario analysis in making revenue and expense forecasts for a project?
Answer: I would look at whether I had done similar projects before. If I have, I would use historical data. If the project is directed towards a market that I do not know much about, I would use market testing. If I know the market, but the success of the project is contingent on three of four major factors (the economy, competitive reactions…) I would use scenario analysis.
CT 9.2: The depreciation that we used for the project above is assumed to be the same for both tax and reporting purposes. Assume now that the Home Depot uses more accelerated depreciation methods for tax purposes and straight line depreciation for reporting purposes. In estimating project earnings, which depreciation should we use?
Answer: For project earnings, a case can be made for either. While tax depreciation is more meaningful, the accounting earnings I will report to stockholders is based upon my reporting books. For project cash flows, the choice is much cleared. I would use the depreciation in my tax books, since my tax benefit will be based upon it.
CT 9.3: In the analysis above, we assumed that InfoSoft would have to maintain additional inventory for its on-line software store. If, instead, we had assumed that Infosoft could use its existing inventory, would the cash flows on this project have increased, decreased or remained unchanged?
Answer: The cash flows would have increased during the operating life of the project since there would have no need for the investment in inventory each period.
CT 9.4: In the analysis above, we assumed that the Home Depot borrowed $5 million to finance the new store. If instead, we had assumed that they had used no debt, would the cash flows to equity have been higher, lower or unchanged?
Answer: The initial investment (in equity terms) would have been more negative, but the cash flows each period to equity investors would have been more positive (since there would have been no interest and principal payments). The net present value effect could have cut either way….
CT 9.5: When cash flows on investments are time-weighted (discounted), we are biasing ourselves against investing in long term projects. Is this statement true? If yes, why? Si no, ¿por qué no?
Answer: This is not true. We might be taking fewer long term investments than we otherwise would have, but the ones we reject are rejected for the right reason. They do not generate a sufficient return for us, given the time value of money.
Chapter 10: Investment Decision Rules
CT 10.1: Firms with good managers do not need investment decision rules. Is this statement true? ¿Por qué o por qué no?
Answer: This statement is false. Even good managers need a consistent rule that they can use to determine where and when to invest. Without an investment decision rule, each manager may follow a different rule, resulting in a final portfolio of projects that does not maximize firm value.
CT 10.2: Do discounted cash flow rules require more information than accounting income based rules? If yes, what additional information do they require?
Answer: We do need some additional information. To get from earnings to cash flows, we do need to know how much is being spent on working capital and capital investments. To discount these cash flows, we need a cost of equity and capital. It can be argued, however, that to use the accounting return on capital, for instance, we would still need a cost of capital.
CT 10.3: What types of firms are good candidates for the IRR rule? What types of firms are suited for the NPV rule?
Answer: Firms with severe capital rationing constraints and lots of high return projects are good candidates for the IRR rule. Firms without capital rationing constraints and projects with returns closer to the cost of capital are good candidates for the NPV rule.
CT 10.4: In the 1980s and 1990s, the attractiveness of net present value as an investment decision rule increased, relative to other decision rules. What might account for this shift?
Answer: There are at least two reasons we would offer for this shift. The first is the greater focus on stock prices and value maximization at many firms. The second is easier access to capital markets for even smaller firms (reducing the capital rationing constraint).
Chapter 11: Investment Analysis with Inflation and Exchange Rate Risk
CT 11.1: Under what conditions will a project's net present value be unaffected by unanticipated inflation?
Answer: For the net present value to be unaffected by unanticipated inflation, the cash flows would have to increase proportionately with the discount rate. For cash flows to increase proportionately, inflation will have to affect cash inflows (revenues) the same way it affects outflows (expenses & taxes).
CT 11.2: A company in a high-inflation economy has asked for your advice regarding which currency to use for investment analysis. The company believes that using the local currency to estimate the NPV will yield too low a value, because domestic interest rates are very high - this, in turn, would push up the discount rate. ¿Es esto cierto?
Answer: No. If domestic interest rates are high, the expected inflation is also high. The cash flows in the local currency will reflect this higher inflation, and thus offset the effect of the higher discount rates.
CT 11.3: Assume that you are worried about risk in the above transaction, but that you believe that there is still a much greater chance that the Singapore dollar will strengthen rather than weaken. Would you use the forward contract or the put option? ¿Por qué?
Answer: I would use a put option in this case. This would allow me to protect myself against the downside risk, while I could benefit from the upside rewards if my belief is right.
Chapter 12: Project Interactions, Side Benefits and Side Costs
CT 12.1: Implicitly, by computing the net present value of making the replacement, we are assuming that the new machine will have the same life as the old machine. How would you modify this analysis if the old machine has a much shorter remaining life than the new machine?
Answer: If the machines have different lives, I would either allow for replication of the investments to have the same overall life, or compute an equivalent annual cost for both machines.
CT 12.2: Firms that believe they are under valued by financial markets are much more likely to view themselves as facing a capital rationing constraint than firms that view themselves as fairly or over valued. ¿Por qué?
Answer: Firms that believe that their stock is undervalued are less likely to issue stock to raise equity for new projects. This leaves them dependent upon internal equity (retained earnings) and thus makes them more capital constrained than firms that issue stock to raise equity.
CT 12.3: An analyst at the Home Depot argues that it is better to be conservative in investment analysis and always consider the cannibalized sales at other stores when doing investment analysis. ¿Estás de acuerdo?
Answer: No. This would result in more stores being rejected. If what follows is competition moving in and opening stores close by, the firm will be worse off, since the cannibalization will occur anyway.
CT 12.4: In the analysis above, the cost of capital for both the restaurant and the store were assumed to be 9.51%. Assume that the cost of capital for the restaurant had been 15%, while the cost of capital for the store had stayed at 9.51%. Which discount rate would you use for estimating the present value of synergy benefits?
Answer: The synergy accrues to the store, in this case, since more books are sold (not more cappucinos). I would therefore use the cost of capital of 9.51%. If the synergy accrues to both the store and the restaurant, I would have value each synergy stream separately.
CT 12.5: If we perceive research and development expenses as the price of acquiring options (product patents), will research and development expenditure have more value if directed to areas where the technology is stable or areas where the technology is volatile. Explique.
Answer: If viewed as options, R&D expenditures will have more value in areas where technology is volatile, assuming other things remaining equal. Higher variance makes options more valuable.
Chapter 13: Investments in Non-cash Working Capital
CT 13.1: Under what conditions would you use the broader measure of working capital (current assets — current liabilities) in estimating cash flows?
Answer: If cash were necessary for the day-to-day operations of the firm, and short-term debt is not counted as part of debt in the cost of capital computation, I would use the broader definition of working capital.
CT 13.2: As inflation and interest rates rise, will the effect of working capital changes on net present value increase or decrease? Explique.
Answer: It will increase. The cash outflows from working capital occur early (as the project is initiated and grows) while the cash inflows occur late (when the working capital is salvaged). As interest rates increase, the present value effect will increase and become more negative.
CT 13.3: Manufacturing firms tend to have high working capital due to inventory needs at every stage in the process. If you were the manufacturer of high-priced goods, would you expect working capital needs to be higher or lower than for a manufacturer of low-priced goods?
Answer: I would expect it to be higher for two reasons. First, the inventory that I have will have a higher cost, because I sell more high-priced goods. Second, the turnover ratios are likely to be lower, since I will sell than a low-priced good manufacturer.
CT 13.4: Assume that you are a retailer who carries hundreds of items in your store. What are some of the factors you would consider in trying to decide which items you should reduce your inventory of?
Answer: I would reduce the inventory on those items where the cost of lost sales is likely to be lowest. Thus, if there are items that are seldom asked for or where I am the sole distributor, I would be more inclined to reduce inventory on these items.
Chapter 14: Investments in Cash and Marketable Securities
CT 14.1: Do you think technological advances in banking will increase or decrease net float for firms? Are some firms more likely to benefit than others? Explique.
Answer: I think they will decrease net float at large firms. These firms will take advantage of technology to process payments to them faster, while using the same technology to slow down payments to their customers. Smaller firms may also be able to use technology to their advantage while working with customers, but may find themselves on the wrong end when dealing with larger firms. Overall, float in the economy should decrease.
CT 14.2: Assume that you are comparing two firms in the same sector with very large cash balances. MicroTemp Inc, the first firm, has maintained a return on equity of 35% over the last 5 years of its existence. GenWaste Inc, the second firm has had an average return on equity of 22%, but the returns have been dropping significantly each year. In which of these two firms is cash likely to be viewed as value destroying and why?
Answer: Cash is likely to be viewed as potentially value decreasing at GenWaste because of its declining return on equity. Investors will assume that the marginal investments are becoming less attractive, and will worry about the cash going into these investments.
CT 14.3: Assume that a firm invests its cash in private businesses. How would you evaluate whether these investments will increase or decrease the value of the firm?
Answer: The same way that I would judge its investments in publicly traded firms. I would look at the cash invested in the businesses, and the cash returned by these businesses over time. If the present value of the cash inflows from these businesses exceeds the cash invested in these businesses, they will increase value.
CT 14.4: The Home Depot holds less cash than its peer group. Under what conditions is this low cash balance likely to become a liability and why?
Answer: The low cash balance can become a liability if cash is needed for day-to-day operations or for taking advantage of sudden investment opportunities (a takeover opportunity, for instance).
Chapter 15: Investment Returns and Corporate Strategy
CT 15.1: Is the fact that the EVA is negative necessarily an indication of poor project choices? ¿Por qué o por qué no?
Answer: The EVA just measures whether an investment earned more than its cost of capital in the current period. This is not necessarily indicative of the quality of the project. A good project may earn less than its hurdle rate early in its life and make up for it with much higher returns later. A good project can also have a bad year. Finally, the return on capital, which is based upon accounting measures of operating income and capital invested, may not accurately reflect the true return on an investment.
CT 15.2: In the personal computer business, Dell Computer had emerged as the leader by the end of the 1990s. What is the strategy it adopted and what was its competitive advantage?
Answer: Dell established a clear cost advantage over its rivals by revamping its manufacturing operations, cutting out middlemen and selling directly to customers. It used this cost advantage to aggressively under-price its competition and earn market share.
CT 15.3: A manager of a firm with a significant number of divisions earning less than their required returns argues that firms should always divest or terminate underperforming divisions (i. e. divisions that earn less than the cost of capital). ¿Estás de acuerdo? ¿Por qué o por qué no?
Answer: I do not agree. The question of whether a division that earns less than its cost of capital should be divested or terminated cannot be answered without looking at the cash flows the firm would get from these actions (divestiture or salvage value) and comparing them to the present value of cash flows from continuing in business. Divestiture or termination makes sense only if the divestiture or salvage value is higher than the continuing value.
Chapter 16: An Overview of Financing Choices
CT 16.1: Can a firm be financed entirely with debt? ¿Por qué o por qué no?
Answer: No. Someone has to bear the residual risk. When a firm's debt ratio climbs towards 100%, the debt will begin to take on the characteristics of equity. (This is why junk bonds behave more like stocks than bonds)
CT 16.2: Both warrants and contingent value rights are equity options. Why might some firms use warrants and others contingent value rights?
Answer: Warrants are call options and are more likely to be used by growth firms to take advantage of both the perception that they are volatile and that their stock prices will rise over time. Contingent value rights are put options and are more likely to be used by mature firms to provide investors with an instrument to protect themselves against downside risk.
CT 16.3: In a lease, both the lessor and the lessee can gain from the transaction. ¿Cómo es esto posible? If they both gain, who is the loser?
Answer: The most common loser is the government. One of the largest benefits from leasing is that the lessor gets a larger tax benefit from the purchase of the asset than the lessee would have.
CT 16.4: Assume that a company has only convertible debt outstanding, and that the stock price increases over the following years. Assume, further, that the convertible debt is not converted. What will happen to the debt ratio over time, and why?
Answer: The proportion of the convertible bond's market value that is equity will risk as the stock price rises. Thus, the firm's debt ratio will decrease as the stock price increases.
Chapter 17: The Financing Process
CT 17.1: Firms prefer to finance investments with internal funds, because internal financing is cheaper than external financing. Is this statement true? ¿Por qué o por qué no?
Answer . If by cheap, firms imply that internal financing has a low cost, they are wrong. Internal financing has the same cost as all equity, albeit without the issuance costs. It is more expensive than debt.
CT 17.2: Shelf registration is much more common with corporate bonds than with equities. Why might this be so?
Answer . Bonds are much more easily sold without investment banking support. Equity is much more dependent upon sales and marketing efforts by investment banks, especially when the issue is a public market issue. Furthermore, firms are much more willing to raise debt at short notice than equity.
Chapter 18: The Financing Mix: Trade Offs and Theory
CT 18.1: The returns on capital earned by European firms have traditionally been lower than the returns on capital earned by firms in the United States. European firms also have tended to use less debt and hold more cash than US firms. Is there a possible link between these two phenomena? What might explain them?
Answer . Firms with high and stable cash flows that do not borrow money tend to be undisciplined in their investment analysis. The low returns on capital (poor investments), high cash balances and low leverage could all be the result of this lack of discipline.
CT 18.2: The argument for preserving flexibility is in many ways the polar opposite of the free cash flow argument for increasing debt. Which of the two views do you agree with? ¿Por qué?
Answer . It would depend upon the firm and its management. For firms in high return sectors with good management, I would lean towards the flexibility argument. For firms in mature businesses with poor management, I would lean towards the free cash flow argument.
CT 18.3: Why is the expected bankruptcy cost much larger to the owner of a private business than it is to the stockholders in a publicly traded firm?
Answer . When private firms go bankrupt, the owner’s personal assets might be put at risk (if there is no limited liability). In addition, the owner is likely to be undiversified and will be hit much worse by the loss of equity value. When publicly traded firms, their stockholders have limited liability and tend to be more diversified.
CT 18.4: Is it possible for firm value to be unaffected by capital structure decisions for some firms but not for others? ¿Por qué o por qué no?
Answer . Sí. For some firms, the benefits and the costs from borrowing may be balanced (leading to no net benefits). For these firms, capital structure changes may not affect firm value. Another scenario where borrowing might not affect value is the case of a firm that is tax exempt and has large and stable cash flows — the tax benefits and bankruptcy costs at such a firm will both be close to zero.
CT 18.5: What other explanations could there be, besides firms being generally under levered, for stock prices tending to increase when firms increase leverage?
Answer . When firms increase leverage, they might send a signal to financial markets that they are confident about their capacity to generate cash flows to cover debt payments. This signal may lead to an increase in stock prices.
CT 18.6: Would you view the existence of a financing hierarchy as evidence that firms do not have optimal debt ratios? ¿Por qué o por qué no?
Answer . No. Firms can have preferences about how they raise financing, but still have optimal debt ratios. Thus, a firm may prefer to use new debt rather than new equity, but it can still use internal equity to maintain a desired debt ratio.
Chapter 19: The Optimal Financing Mix
CT 19.1: What are some of the factors that would determine the maximum acceptable probability of default for the management of a firm? Would you expect closely held companies, where managers hold a large percentage of the outstanding stock, to behave differently from widely held companies?
Answer . I would expect the managers’ risk aversion, past experience and holdings in the firm to all play a role. Managers who are more risk averse, who have had past experiences with default and who have more of their wealth invested in the firm will not be willing to accept a high probability of default. Consequently, managers in closely held companies will set lower probabilities of default than managers in widely held firms.
CT 19.2: Can you think of other industries where the operating income is sensitive to the bond rating? What are the implications for optimal capital structure analysis for firms in these industries?
Answer . I would expect the operating income to be sensitive to bond rating in any sector where the perception of default can affect revenues and operating income. Consequently, it should be high in firms that sell durable products that are expensive and require servicing (computers, copiers…). These firms should be more cautious about borrowing than other firms.
CT 19.3: We have stated the return differential in terms of equity: return on equity versus cost of equity. How would you reframe this analysis if you wanted to state the return differential in terms of capital?
Answer . I would look at the difference between the return on capital and the cost of capital. Since the return on capital is not a function of leverage, the optimal debt ratio will be the point at which the cost of capital is minimized.
CT 19.4: The most difficult input to obtain in the adjusted present value approach is the bankruptcy cost as a percentage of firm value. Why is it so difficult to estimate, and how would you go about estimating it?
Answer . You cannot draw on a firm’s history since a firm seldom go bankrupt and continue to exist. While one can use the experience of other bankrupt firms to estimate the direct cost of bankruptcy, this is much more difficult to do with indirect costs.
CT 19.5: Is it possible for a firm to be underlevered using the cost of capital approach, and overlevered, at the same time, when compared with its peer group? ¿Por qué o por qué no?
Answer . Sí. In a market where all firms in a sector carry too little debt, firms can look overlevered relative to their peer group and under levered using the cost of capital approach.
Chapter 20: Financing Mix and Choices
CT 20.1: Assume a firm has excess debt capacity of $ 2 billion, and that firm value will increase by $ 800 million if this debt capacity is used. The firm is planning on acquiring another firm for $ 2 billion and financing the acquisition with new debt. Even though it is over paying by $ 300 million on the acquisition, the managers of the firm argue that the acquisition makes sense, because the value gained from using excess debt capacity ($ 800 million) is greater than the overpayment on the acquisition ($ 300 million). ¿Estás de acuerdo?
Answer . Yo no. The firm’s value would increase by $ 800 million if it just used the excess debt capacity to buy back stock. The acquisition itself creates a loss in value and is thus a bad investment.
CT 20.2: Adding special features to bonds, such as linking coupon payments to commodity prices or catastrophes, will reduce their attractiveness to investors and make the interest rates paid on them higher. Does it follow then that adding these special features will not create value to the issuing firm?
Answer . While it is true that adding features that shift the risk to bondholders will increase interest rates o bonds, it is not true that there will no added value. By shifting this risk to bondholders, a firm that otherwise would not have borrowed may be able to borrow some money. On an after-tax basis, the cost of this borrowing (even with the high interest rates) will be lower than the cost of equity.
Chapter 21: Dividend Policy
CT 21.1: Some countries do not allow firms to buy back stock from their stockholders. Would you expect dividend payout ratios to be higher or lower in these countries?
Answer . I would expect the dividend payout to be higher, since this is the only way in which firms can return cash to stockholders.
CT 21.2: Given the assumptions needed for dividends to be irrelevant, what types of firms are most likely to find that their values are unaffected by their dividend policies?
Answer . Large firms with predictable investment opportunities, easy and cheap access to capital markets that are held by investors who are tax-exempt (pension funds) or in low tax brackets (poorer, older investors). [Regulated utilities would be a good example]
CT 21.3: Companies generally do not have to pay taxes on 85% of the dividends they receive from other companies, although they have to pay capital gains taxes on all their gains. What implications does this have for the relative tax advantages of dividends and capital gains?
Answer . The tax rate on dividends will be lower than the tax rate on capital gains when other corporations are the primary investors in a firm. This may lead to higher dividend payouts for these firms.
CT 21.4: Paying higher dividends can increase the value of the equity in some firms. What types of firms is this likely to occur in and why?
Answer . Firms with substantial cash build-up, poor investment opportunities and a management that is not trusted by stockholders…. (It would also help if the stockholders were tax exempt or low tax rate individuals)
Chapter 22: Analyzing Cash Returned to Stockholders
CT 22.1: What reasons may foreign markets have for restricting stock buybacks by firms? What is the potential cost of such a restriction?
Answer . They might fear stock price manipulation or expropriation from lenders (banks and bondholders). The cost is that firms will accumulate much larger cash balances than they need, and this cash will not find its way to the best uses (young firms with attractive investments, for instance)
CT 22.2: Companies often start paying dividends because of their desire to attract new investors, who will hold only dividend-paying stock. Do you agree with this rationale for paying dividends for a firm that cannot afford these dividends? ¿Por qué o por qué no?
Answer . No. Dividends will attract the wrong kind of stockholders to this firm. These dividend loving stockholders will demand more dividends and the firm will find itself having to choose between great investments and paying dividends.
CT 22.3: Assume you are running a firm that has a dividend policy very different from that of the rest of its industry. How would you defend this policy to investors?
Answer . Assuming that it is defensible, I would point to my firm’s better (worse) investment opportunities, higher (lower) variability in cash flows and tougher (easier) access to capital markets to justify a lower (higher) dividend payout than my peer group.
CT 22.4: Some firms that cut dividends announce stock splits or declare stock dividends simultaneously. Why might this make this a difference in the stock price reaction to the dividend cut?
Answer . The stock split and stock dividend may operate as a positive signal (or at least the firms the hope they do) and offset some of the negative impact of the dividend cut.
Chapter 23: Beyond Cash Dividends: Buybacks, Spinoffs and Divestitures
CT 23.1: An alternative strategy is to sell puts on the firm’s stock, giving holders the option to sell back stock to the firm at a fixed price in the future. How is this different from the forward contract described above?
Answer . A put provides a big downside risk, without much upside potential. The forward contract can yield both profits and losses for the firm, whereas the holders of the put contracts will exercise them only if the stock price goes down. Thus, the firm will have tied itself in to buying back stock at an inflated price, if the price drops below the exercise price.
CT 23.2: Some firms do reverse stock splits, in which investors receive one share for every three or four they own. What might be the rationale for a reverse stock split and what effect will it have on stock prices?
Answer . The same as for a stock split. By doing so, a firm might try to bring its stock price up to a reasonable trading range (say, from $ 3 per share to $ 10 per share). If the spreads do not increase proportionately, there should be a drop in transactions costs.
CT 23.3: Firms that introduce tracking stock on their highest growth divisions will see their values go up. Is this statement true? Si no, ¿por qué no?
Answer . Esto no es verdad. The tracking stock may be attractive, because it is on the highest growth divisions, but what is left of the firm will become less attractive. The sum of the two values is what matters, and there is no reason to believe that this will increase.
CT 23.4: Assume that management is viewed as incompetent creates tracking stock on the firm’s most valuable division. Would you expect the stock price reaction to be positive? ¿Por qué o por qué no?
Answer . No. The tracked division will remain part of the parent firm, with no change of control. The incompetent management will continue to run it…
Chapter 24: Valuation: Principles and Practice
CT 24.1: Discounted cash flow models ignore qualitative factors such as the quality of management and brand name. Is this statement true? ¿Por qué o por qué no?
Answer . Esto no es verdad. The inputs in a DCF model (growth rate, length of the high growth period, operating margins etc.) can reflect these qualitative factors.
CT 24.2: Analysts and equity portfolio managers are judged against how the market or sector they operate in has performed. Therefore, they are more likely to use relative valuation than discounted cash flow valuation. ¿Por qué?
Answer . If you can find stocks that are under valued relative to the market or the sector that they perform in, you will come out ahead in the comparison even if all stocks in the market or sector are overvalued. If stock prices drop, your stocks should drop by less (assuming that you are right about the under valuation).
CT 24.3: A valuation based upon multiples is more reliable than one based on discounted cash flows because it requires fewer inputs and fewer assumptions. Is this statement true? ¿Por qué o por qué no?
Answer . Implicit in every multiple are all of the same assumptions (about cash flows, growth and risk) that are explicit in a discounted cash flow valuation. Therefore, it is not true that there are fewer assumptions and inputs in a relative valuation. There is a much greater trust, though, that markets are, on average, right.
Chapter 25: Value Enhancement: Tools and Techniques
CT 25.1: What would happen to the value increases if these firms made the changes in debt ratios and returns on capital gradually, rather than instantaneously, as we have assumed?
Answer . The effect on value would be smaller, since it is the present value of the effects that matter.
CT 25.2: The economic value added is a dollar measure of excess returns, whereas CFROI is a percentage measure. For a small firm, with significant capital rationing constraints, what might be some of the advantages of using CFROI?
Answer . For firms with limited capital, investing in high CFROI projects may yield a much higher bang for the limited buck (capital) that they have. Investing in the highest EVA projects may eat up the capital very quickly, leading to less value enhancement….
Chapter 26: Acquisitions and Takeovers
CT 26.1: Merger waves seem to end with excesses — bidders overpaying for companies and paying a hefty price. The restructuring and buyout wave of the 1980s ended, for instance, after several leveraged buyouts towards the end of the decade failed. Why do merger waves crest?
Answer . Because firms overpay by larger and larger amounts as the wave continues — the deals become more and more difficult to find as the wave continues. At some point, a firm or firms overreach and pay so much that they go bankrupt or fact a crisis. When this happens, other firms notice and scale down their expectations….
CT 26.2: The managers of bidding firms whose stock prices go down on acquisitions, often argue that this occurs because stockholders do not have as much information as they do about the target firm’s finances and its fit with the bidding firm. How would you respond to the argument?
Answer . It is true that stockholders do not have has much information about the merger as managers do, but they have a much better perspective on the merger. Managers tend to get so close to the action of the deal that they lose their objectivity.
CT 26.3: Assume that you have been in put in charge of coming up with an acquisition strategy for your firm. What are some of the actions you would take to make the strategy a success for your stockholders?
Answer . I would focus on small firms that are closely held, where I can come in and make significant improvements to operations and relax severe capital constraints. I would also look for private businesses with valuable products or customers. I will rule out acquisitions where I have to bid against others to get a target firm. Finally, I will put together a team designed to come into acquired firms to put into practice the planned changes and synergies…
CT 26.4: Consider only anti-takeover amendments that require shareholder approval. What types of firms are most likely to be successful in getting such amendments approved? In particular, do you see such amendments having a greater chance of success in well managed or badly managed firms?
Answer . Firms that are well managed should have much greater chance of getting their stockholders to agree to such amendments, since they give incumbent managers more power,
CT 26.5: If the Congoleum acquisition creates value for the acquiring investors, what are the sources of the increase in value?
Answer . One could be the tax benefits that flow from the higher depreciation and a more efficient use of debt capacity. The second could be the more efficient operation that result from managers being owners as well. The third could be that Congoleum was under valued in the first place.
Chapter 27: Option Applications in Corporate Finance
CT 27.1: Assume that you are valuing options on stock in a private firm. How would you go about estimating the value of the options? Why might you view the value you obtain from an option pricing model more cautiously than if the firm were public?
Answer . I would first estimate the value of equity in the private firm, and use the variance in stock prices of publicly traded firms in the same business. I would be cautious about using this value, since the underlying asset’s value is an estimate and arbitrage (which is what keeps the option pricing model together) is much more difficult.
CT 27.2: A firm that is considering a new project with a net present value of -$100 million decides to invest in it, because is provides it with expansion options. Under what conditions do you think this is reasonable? When is it not?
Answer . Only if the new project (with the negative net present value) is necessary for the subsequent expansion and there as substantial opportunities for sustained excess returns in the expansion (arising from strong competitive advantages).
CT 27.3: Assume that you are valuing the equity in two firms with high leverage and negative earnings. One has very long term debt, and the other has short term debt. Which one would you expect to have more valuable equity? ¿Por qué?
Answer . I would expect the firm with the long term debt to have more valuable equiy, since the option to liquidate (which determines the value of equity) will have a longer maturity.
CT 27.4: What types of firms are likely to face significant constraints in raising external capital? What implications would you draw for the value of financing flexibility at these firms?
Answer . Small firms that are either private or closely held are likely to face significant constraints on external financing. I would expect them to value financial flexibility much more.
WWWFinance
Project Evaluation
Copyright 1995 by Campbell R. Harvey. Todos los derechos reservados. No part of this lecture may be reproduced without the permission of the author.
1. Introducción
We have assumed that the firm selects positive net present value projects. Our concern was with the financing of the investment projects in terms of the capital structure of the firm and the allocation of cash flows via the dividend decision. In this lecture, we examine in some detail what goes into the decision to accept an investment project. We will apply the technique of net present value and develop some rules known as capital budgeting . There are four basic rules for calculating net cash flows. First, use inflows and outflows of cash when they occur -- avoid using "accounting variables". Second, use after-tax net cash flows. Third, use only cash exchanges. In general, it is not appropriate to include opportunity costs. Fourth, discount after-tax cash flows at the after-tax interest rate. Some of the common mistakes in capital budgeting are also highlighted. These include mixing real and nominal cash flows, ignoring embedded options in the project, and ignoring the shadow cost of management time to run or oversee the project. Different appraisal methods are then examined. There is some discussion of decision trees and Monte Carlo simulation in project evaluation. Finally, I close with a brief discussion of mergers and acquistions.
2. The Cash Flows that Should be Included in NPV Calculations
The net present value of a project can be represented as: Let's consider an example of this type of calculation.
Ejemplo
A large manufacturing firm is considering improving its computer facility. The firm currently has a computer which can be upgraded at a cost of $200,000. The upgraded computer will be useful for 5 years and will provide cost savings of $75,000 per year. The current market value of the computer is $100,000. The cost of capital is 15%. Should the computer be upgraded?
Solución
The alternatives available to the manufacturing firm are: (1) do not upgrade the computer or (2) upgrade the computer. The NPV of upgrading is:
The" /> R_t = $ cash revenue in time t E_t = $ cash expenses in time t TAX_t = $ taxes in time t D_t = $ depreciation in time t T = $ average and marginal tax rate I_t = $ Investment in time t S_t = $ Salvage value in time t
The net cash flow in period t is: Taxes are defined to be: Substituting the expression for taxes into the first equation yields: Note that we are making a number of simplifying assumptions about the taxation. In an real world application, one would want to consider (1) carry forward and carry back rules, (2) investment tax credits, (3) sufficiency of taxable income, and (4) special tax circumstances (e. g. mining and petroleum).
3. Inflation and Capital Budgeting
Inflation can have a major impact upon the capital budgeting decision. At one level, the expectation of inflation is captured in the nominal interest rate. The discount rate that we use in evaluating the present value of a project is a function of the nominal interest rate as well as the risk of the cash flows. The real rate of interest (nominal interest rate less expected inflation) is less volatile than the nominal rate. At another level, the cash flows of the project could be affected by the inflation rate. If nominal interest rates reflect expected inflation, then we should make sure that the cash flows that we are discounting also reflect expected inflation. There are two alternatives available. First, use nominal cash flows and nominal discount rates for the capital budgeting decision. Second, use real cash flows and real discount rates. It is simple to show that discounting nominal cash flows with the nominal rate is equivalent to discounting real cash flows with a real rate. If you mix real cash flows with the nominal rate or vice versa, then net present value will be incorrect. This could lead one to accept an investment project when you have rejected it. There are some why the net cash flows may not grow at the inflation rate. The first reason has to do with the depreciation tax shield. Remember that: It is possible that R_t, E_t, I_t and S_t all grow at the inflation rate. However, the depreciation, D_t is nominally fixed which means that it does not grow with inflation. As a result, it is unlikely that the cash flows grow at the rate of inflation. The second reason has to do with relative price changes. The inflation rate captured in the interest rate reflects average inflation in the economy. But the prices of different goods change at different rates. As a result, if the prices of the goods that are reflected in the cash flows of the firm could rise faster or slower than the average rate which is captured in the interest rate.
4. Applications
4.1 Example 1 (Ross-Westerfield)
(a) Suppose a firm is considering an investment of $300,000 in an asset with a useful life of five years. The firm estimates that the annual cash revenues and expenses will be $140,000 and $40,000, respectively. The annual depreciation based on historical cost will be $60,000. The required rate of return on a project of this risk is 13%. The marginal tax rate is 34%. What is the NPV of this project? (b) The 13% required rate of return is a nominal required return including inflation. Suppose the firm has forgotten that revenues and expenses are likely to increase with inflation at a 5% annual rate. Recalculate the NPV. Is this a more attractive proposal now that inflation has been taken into account.
Solution (a)
Calculate the after-tax cash flows: Calculate the PV of the cash flows:
Calculate the after-tax cash flows: Calculate the PV of the cash flows:
The" />4.2 Example 2 (Ross-Westerfield)
You have been asked to value orange groves owned by the Roll Corporation. The groves produce 1.6 billion oranges per year. Oranges currently sell for $.10 per 100. With normal maintenance, this level of production can be sustained indefinitely. Variable costs (primarily upkeep and harvesting) are $1.2 million per year. Fixed costs are negligible. The nominal discount rate is 18%, and the inflation rate is 10%. Assuming that orange prices and the variable costs move with inflation, what is the value of the orange groves (ignore taxes and depreciation).
Solución
First, the current cash flow is 1.6 billions oranges at $.001 each less $1.2 million in costs, or $.4 million per year. At this point, it is tempting to treat the $.4 million as a perpetuity and divide it by .18 to calculate the value. This would be a mistake. The $.4 million does not reflect future inflation. The 18% discount rate \underbar reflect inflation. The mistake would be dividing a real cash flow by the nominal rate. To be consistent, we need to use either the real cash flows and the real discount rate or the nominal cash flows and the nominal discount rate. Let's do both. The real discount rate is
" /> The Trout Corporation is deciding whether or not to introduce a new form of aluminum siding. Projected sales, total new net working capital (NWC) requirements and capital investments are: Variable costs are 60% of sales, and fixed costs are negligible. The $20 million in production equipment (capital investment CI) will be depreciated straight-line to $0 over 5 years. It will actually be worth $10 million in six years. If 10% is the required return, should Trout proceed. The corporate tax rate is 34%. Notice that I am assuming that Trout can take full advantage of the depreciation tax shield. Notice also that the capital equipment is worth $10 million in year 6. When it is sold, the after tax revenue is $6.6 million. The present value of the future cash flows is $18.261 million. The total initial outlays is $20.4 million. So the NPV of this project is -$2.139 million. Hence it should be rejected.
4.4 Example
The WWW company is cash rich and is looking to take over another firm. The required rate of return that investors in WWW demand is 18%. Three potential takeover possibilities exist. The first firm (code named by its industry group) is Leisure Inc. This firm has the ability to deliever net after tax cash flows of $100,000 in the first year and a growth rate of 6% indefinitely. The second firm is Graphics Inc. Graphics can deliver $140,000 in the first year and a 4% growth rate thereafter. Finally, Paint Inc. will deliver $120,000 in the first year and 5% growth indefinitely. The expected return on the market is 13%. The risk free rate is 7%. The beta s for Leisure, Graphics and Paint are 1.16, 1.64 and 0.70 respectively. All of these firm should be able to be taken over for $1 million. Which one do you choose?
Solución
First, calculate the expected (required rates) of return on each of these firms. Using the CAPM: Now calculate the present values of the cash flows.
The" />5. Appraisal Rules
Throughout this course, we have stated that the value of the asset is the discounted present value of the asset's cash flows. We have assumed that the net present value rule is the only rule that should be considered. In fact, businesses use many other rules to evaluate investment projects. Sometimes these rules give the correct evaluation (consistent with NPV). But it is possible that these other rules yield an incorrect assessment of the worth of an investment project. There are two type of projects that we will be considering. The first category is independent projects . This means that accepting one project does not affect decisions about the other project. The second category is mutually exclusive projects . This means that only one of a given set of projects can be taken (e. g. different sized factories). The purpose of this lecture is to compare the other techniques to the present value rule. These other techniques are: (1) Internal Rate of Return, (2) Payback, (3) Discounted Payback, (4) Profitability Index. The bottom line is to always use net present value. Given that you work at a firm that uses one of the four alternative techniques, you have to know what is wrong with these techniques if you are going to sell the firm on net present value as the only capital budgeting rule.
5.1 Why Net Present Value is the Dominant Rule
Suppose we are evaluating an investment project. The NPV rule tells us that the project should be accepted. But one of the alternative rules tells us that the project should be rejected. The correct investment decision maximizes the market value of the firm. The initial market value of the firm is:
This" />5.2 Internal Rate of Return
The internal rate of return is:
Now" />5.2.1 Evaluation of Borrowing
Consider the following investment project. This project can be thought of as borrowing. Now consider solving for the IRR.
We" />5.2.2 Multiple Rates of Return
It was mentioned earlier that the internal rate of return rule worked for normal cash flows and a flat term structure. Consider an example of non-normal cash flows. Note that the cash flows switch sign from year to year. Now consider solving for the IRR.
There" /> Note that the cash flows switch sign from year to year. In this case, they are positive, negative and positive. Now solve for the IRR.
The" />5.2.3 Undefined IRR
Consider the following cash flows: To solve for the IRR, set x=1/(1+R) . To get the IRR, we need to solve for an x that satisfies:
We" />5.2.4 Non-Uniform Term Structure
Now we consider the possibility of a non-uniform term structure. Suppose we are faced with the following cash flows and one period interest rates: This just represents the cash flows from purchasing a five year bond than pays an 8% coupon. The internal rate of return is 8%. Now let's calculate the net present value of cash flows. In the case of the non-uniform term structure, the IRR is not that meaningful of a measure.
5.2.5 Mutually Exclusive Projects: Scale Differences
Now we will consider the problems with using IRR to evaluate mutually exclusive projects. Suppose you are evaluating the investment project of building a new factory. You have two options on the size the project. Below is a calculation of the NPV and IRR. Notice that the IRR rule tells us to accept project A and the NPV rule tells us to accept project B. The IRR rule can not distinguish between a $1 investment and a $1 million dollar investment.
5.2.6
Mutually Exclusive Projects: Cash Flow Timing The IRR is also problematic in that it does not tell us anything about the timing of the cash flows. Consider the following example of cash flows: The IRR rule will not be able to distinguish between these projects. The IRR is 10%. For any discount rate, below 10% the IRR tells us that both projects are acceptable. But for any discount rate below 10%, project B has a higher NPV than A. Note that project A's cash flows all come in the first year whereas all of project B's cash flows come in the second year. Graphically,
5.3" /> The payback is the N^* that satisfies:
where" />5.4 Discounted Payback
The discounted payback is the N^* that satisfies:
The" /> In this example, the discounted payback tells us to accept project A but project B has a higher NPV.
5.5 Profitability Index
The profitability index is defined as:
There" /> The profitability index suggests that project A is superior to project B. However, the net present value of B far exceeds that of A.
6. Tax Considerations
We have already learned how to make capital budgeting decisions for both riskless and risky projects: Discount all the cash flows by using appropriate discount rates. For riskless or almost riskless projects, the interest rates are sufficient. For risky projects, we pair them with stocks that are of the same risk levels and use the expected returns on the stocks as the discount rates. However, this method works only to all-equity financed firms, an assumption we have implicitly made. This assumption is not true in the real world. What happens when firms do have debt?
6.1 Weighted Average Cost of Capital
When a firm has debt and equity, it has a cost of equity capital and a cost of debt capital. Let R_S be the cost of equity capital and R_B be the cost of debt capital. Let T be the tax rate. The weighted average cost of capital (WACC) is a weighted average of the after-tax rates
If the firm is all-equity financed, B=0 . WACC=R_S . i. e. WACC is the cost of equity;
If the firm is all-debt financed, S=0 . WACC =R_B(1-T) . i. e. WACC is the after-tax cost of debt.
We use the WACC for discounting a project's cashflow if and only if:
The project and the firm have the same systematic risk
The project and the firm have the same debt capacity
6.2 The adjusted-present-value (APV)
To capture the effect of debt-financing, the WACC finds a new appropriate discount rate. There is an alternative approach which computes the NPV under all-equity assumption and then adjusts it by the debt-financing effect. As a result, this approach is called adjusted-present-value technique or APV . In formula, it states: Adjusted PV = All-equity value + Additional effects of debt APV is perhaps best understood by an example:
Ejemplo
A firm, with debt and equity half each, has an investment project that costs $10 million today but generates after-tax $2 million in perpetuity starting from next year. Assume the firm's tax rate is 34% and the cost of unlevered equity is 20%. If the firm can finance the project by borrowing $5 million at 10%. What is the APV? The NPV of the project if the firm were all-equity: Now the PV of tax-shield is: Hence, the adjusted present value is In general, the additional effects of debt include:
floatation costs .
tax shield from debt .
effects of subsidized financing .
They can be adjusted one by one in the APV computation. Often in the real applications, we
Use WACC if the project is close to scale-enhancing
Use APV if the project is far from scale-enhancing.
7. Additional Decision Tools
Decision trees are a convenient way of representing sequential decisions over time in an uncertain environment. This is best understood by the attached example. To make any estimate of cash flows over the uncertain future periods, certain assumptions have to be made. Optimistic assumptions often lead high cash flow estimates whereas pessimistic assumptions often lead low estimates. Sensitivity analysis examines how sensitive a particular NPV calculation is to changes in underlying assumptions. Similarly, Scenario analysis examines how sensitive the NPV calculation is to changes in different likely scenarios. Traditional NPV analysis identifies the expected cash flows and discount them according to their systematic risk. An alternative and increasing popular approach to project evaluation is Monte Carlo simulation .
Ejemplo
Suppose you are facing an investment which cost $100 today, but generates cash flows for the next two years. Assume the discount rate is 10%.
Step 1. Modeling
Step" /> We do not know the cash flows for sure, but we can forecast them or make our best guesses. Assume CF_1 and CF_2 follows normal distributions, CF_1 has mean $70 with standard error $7 and CF_2 has mean $60 and standard error $12. This implies that $70 is the expected cash flow next year. However, due to some uncertain economic conditions, the actual cash flow next year will be different from $70. But we believe it has about 68.26% chance to be in $70 plus or minus $7 and 95.44% chance to be in $70 plus or minus $14. Or if we take $70 as the forecasting value of CF_1 . we have 68.26% chance of making 10% forecasting error and 95.44% of making 20% error.
Step 3. Draw Cash Flows from the Specified Distributions A computer can be used to easily draw CF_1 and CF_2 from two normal distributions with means 70 and 60, standard errors 7 and 12 respectively.
Step 4. Compute the NPV With cash flows drawn in Step 3, the NPV is computed from the model of Step 1.
Step 5. Repeat 3 and 4 for a Specified Number of Times Generally, hundreds or thousands repeated computations of 3 and 4 are required. 10,000 times would be a good choice for many problems.
Step 6. Determine the Distribution of NPV With the hundreds or thousands repeated computed values of NPV from Step 5, we are able to determine the distribution of NPV, in particular the mean and standard error. All this is what we need for our decision making.
8. Real Options in Project Evaluation
8.1 Overview
These options available to management as part of the project. They sometimes known as an operating options.
Ejemplo
Electric utility has choice of building a power plant that:
Burns oil
Burns either oil or coal
Plant (1) is cheaper to construct. Naive implementation of present value might suggest that plant (1) be constructed. But while (2) costs more, it also provides greater flexibility. Management has the ability to select which fuel to use and can switch back and forth depending on energy conditions. Proper implementation of present value analysis (or discounted cash flow, DCF) must take the value of this operating option into account.
8.2 Input Mix Options:
Electric utility problem is one example of an input mix option. Many operating facilities (such as oil refineries and chemical plants) can use different mixes of inputs to produce same output.
8.3 Output Mix Options:
Some facilities can use the same inputs to produce different arrays of outputs.
8.4 Abandonment Options (or Termination Options)
Traditional capital budgeting assumes that a project will operate in each year of its lifetime. There are two type of options:
Option to completely terminate
Option to stop production temporarily
8.4.1 Temporary Stop Options
For many projects with production facilities, it may not be optimal to operate a plant in a given year -- because revenue will not cover variable cost. Explicit recognition of this type of flexibility is critical when choosing among alternative production technologies with different ratios of variable-to-fixed costs.
8.4.2 Permanent Stop Options
Abandonment option (or option to sell) is like an American put option. When present value of the asset falls below the liquidation value, then sell asset. Abandonment is like exercising the put option. These options are particularly important for large capital intensive projects (such as nuclear plants). They are also important for projects involving new products where their acceptance in the market is uncertain.
In" />8.5 Intensity Options:
Closely related to the Abandonment Options. Intensity Options are the flexibility to expand or contract the scale of the project. Examples--
Change output rate per unit of time.
Change total length of production run time.
8.5.1 Option to Expand
Build production capacity in excess of expected level of output (so it can produce at higher rate if needed). Management has the right (not the obligation to expand). If project conditions turn out to be favorable, management will exercise this option.
Project" />8.5.2 Option to Contract
This is the equivalent to a put option. Many projects can be engineered in such a way that output can be contracted in future. Example--modularization of project. Forgoing future expenditures is equivalent to exercising the put option.
Project" />8.5.3 Option to Expand or Contract (Switching Option).
This is the most general situation. It is equivalent to the firm having a portfolio of call and put options. Restarting operations when project currently shut down is a call option. Shutting down is a put option.
Project" />
Choose plant with high maintenance costs relative to construction costs. Management gains the flexibility to reduce the life of the plant and contract the scale of project by reducing expenditures on maintenance.
Build plant whose physical life exceeds the expected duration of use (thereby providing the firm with the option of producing more by extending life of project).
8.6 Initiation Options
Just as Abandonment Option is valuable, so is the option to initiate the project. Example: Purchaser of off-shore lease can choose when, if at all, to develop property. This option has significant value. If U. S. government required immediate development of leases:
Prices paid for leases would decline
Some leases would not be purchased at all.
Also, true for exploration in general. If natural resource companies were committed to produce all resources discovered, then they would never explore in areas where the estimated extraction cost exceeded the expected future price at which the resource could be sold.
8.7" /> Important strategic issue is the sequencing of projects. For example, Successful marketing of consumer products often requires "brand name." Suppose a firm is evaluating projects to produce a number of consumer products. It may be advantageous to implement projects sequentially rather than in parallel. Pursuing the development of a single product, the firm can resolve some of the uncertainty surrounding its ability to establish "brand name." Once resolved, management has the option to proceed or not with the development of the other projects. If taken in parallel, management would have already spent the resources and the value of the option not to spend them is lost.
8.8 Intra vs. Interproject Options:
The sequencing option was an interproject option. That is, the sequencing of projects creates options on one or more projects as the direct result of undertaking another project. Old-style capital budgeting will miss this option because projects evaluated on stand-alone basis. Ignoring interproject options, could lead to significant undervaluation of projects. Extreme case example is R&D: The source of value is the options created to undertake other projects. Interproject options are created whenever management makes an investment that places the firm in a position to use new technology to enter a different industry.
8.9 Present Value of Growth Opportunities:
Value of the firm can exceed the market value of the projects currently in place because the firm may have the opportunity to undertake positive NPV projects in the future. Standard method is to establish the present value of these projects based on anticipated implementation dates. But this implicitly assumes that the firm is committed to go ahead with the projects! However, management need not make such a commitment. Standard valuation methods ignore the option not to go forward.
8.11 Shadow Costs:
Ignoring options usually causes undervaluation of projects. Some projects may have little or no option component. However, standard valuation techniques may overvalue these projects by failing to recognize losses in flexibility to the firm that result from implementation.
8.12 Financial Flexibility:
Choice of capital structure can affect value of project. Like operating flexibility, financial flexibility can be measured by the value of the financial options made available to the firm by its choice of capital structure. Interaction between financial and operating options can be strong -- especially for long-term investment projects with a lot of uncertainty. The option valuation framework is particularly useful to the corporate strategist because it provides an integrative analysis of both operating and financial options associated with the combined investment and financing decisions.
Practical Examples 1: Oil Extraction
Valuation of heavy oil asset. Deferral options are critical. In addition, production could be phased in over time. Conventional NPV will significantly undervalue these assets. Two operating options important: Option to defer and the option of deferring expansion program. In this case, the strike price was $20 per barrel.
Practical Examples 2: Precious Metal Mining
Four silver production sites, each with different layout and extraction technologies. Price of silver has been very volatile. To value firm based upon forecasts of silver prices (traditional NPV approach) could grossly underestimate the value. Value enhanced by: (i) Operational flexibilities and (ii) Switching options (shut down, reopening, abandonment). Insight gained into the opening-up and shutting-down decision. Given the mine was open, it was optimal to keep it open even when the marginal revenue from a ton of output was less than the marginal cost of extraction. Intuitively, the fixed cost of closing an operation might be needlessly incurred if the price rose in the future. Opposite for the closing-down decision. Due to the cost of reopening the mine, the optimal decision might be to keep it closed until the commodity price rose substantially above the marginal cost of production.
Practical Examples 3: Pharmaceutical R&D
A drug company needed to value a new drug research and development project. Four development phases:
initial R&D with 20% chance of success
clinical testing, with 50% chance of success
ing I, with 40% chance of success
ing II, with a 90% chance of success.
Lessons" />
Ignoring options can destroy firm value (projects may be rejected that should be accepted)
Options are to be found in every aspect of the firm's operations
Options need to be recognized -- and valued properly.
9. Mergers and Acquisitions
9.1 The Basic Forms and Types of Acquisitions
There are three basic legal forms about corporate acquisitions:
Merger or Consolidation
With a merger . one firm absorbs another. The acquiring firm retains its name and identity, but the acquired firm ceases to exist.
With a consolidation . a new firm is created. Both firms involved terminate their previous legal existence.
Acquisitions of Stock
A firm buys another firm's voting stock in exchange for cash, stock, or other securities. This is often done by a tender offer . a public offer to buy the stocks directly from shareholders.
Acquisitions of Assets
A firm can buy another firm by purchasing the assets of the target firm.
Given that we have three approaches to acquire a firm, which one should we use? ¿Cuáles son las ventajas y desventajas?
Merger or Consolidation
+ legally simple.
+ Relatively inexpensive, no transfers of titles necessary.
- All liabilities assumed, including potential litigation.
- 2/3 of shareholders (most states) of both firms must approve.
- Dissenting shareholders can sue to receive their `fair' value (`appraisal rights')
Acquisitions of Stock (tender offer)
+ No shareholder meetings or votes necessary
+ Bidder can bypass management and go directly to shareholders.
- Resistance by the target firm's management makes the process costly.
- Often a minority of shareholders hold out.
Acquisitions of Assets
+ Only needs 50% of shareholders' approval, thus avoiding dissident minority shareholders.
- transfers of assets may be costly in legal fees.
Corporate acquisitions not only have the above three legal forms, but also have three economic types:
Horizontal Acquisition
Acquisition of a firm in the same industry as the acquiring firm.
Vertical Acquisition
Acquisition of a firm at a different step of production from the acquiring firm. For example, the ill-fated strategy of Kodak acquiring Sterling Drugs.
Conglomerate Acquisition
Acquisition of a firm in unrelated business.
Now we make a remark on a more general concept, takeovers . A takeover is the transfer of control of a firm from one group to another. It can occur by an acquisition (as described above), a proxy contest . or a going-private transaction . In a proxy contest, a group of dissident shareholders seeks to obtain enough proxies from the firm's existing shareholders in order to gain control of the board of directors. In a going-private transaction, a small group of investors buys all of the firm's common stocks, which later are delisted and are no longer be purchased in the open market.
9.2 Reasons for Mergers and Acquisitions
The primary motivation for most mergers and acquisitions is to increase the value of the combined enterprise. That is the whole is worth more that the sum of the parts. This is often called "synergy". Where does the synergy profits come from?
Economías de escala
Share costly equipment, facilities and personnel, reduce the cost of flotation.
Acquire valuable technologies and resources
For example, many oil company acquisitions took place because it was cheaper to buy existing reserves than to explore new ones.
The target company is undervalued
The target firm's management may not operating the firm to its full potential, leaving room for another firm to takeover and realize the value. Alternatively, the acquiring firm may have insider information on the target firm which leads them to believe the firm has a value higher than the current market value. For example, it is now common to see `expert' on TV giving estimates of a company's break up value. If this exceeds the company's market value, a takeover specialist could acquire the firm at or somewhat above the current market value, sell it off in pieces, and earn a substantial profit.
Tax considerations
A firm with large tax loss carry-forwards may be attractive to another firm that can use the tax benefits. However, IRS may disallow the use of tax loss carry-forwards if no business purpose for the acquisition is demonstrated. Furthermore, under 1986 Tax Reform Act, the carry-forwards is limited.
Some firms which have unused debt capacity may make them acquisition candidates. The acquiring firm can deduct more interest payments and reduce taxes. For example, this was cited as the logic behind the proposed merger of Hospital Corporation of American and American Hospital Supply in 1985. Insiders said the combined company could increase debt by $1 billion.
Inefficient management of the target company
Management could be bad relative to others in the same industry, leading to a horizontal merger. Or, it could be bad in absolute sense, leading to a conglomerate merger. Anybody can come in and do better.
Market power
One firm may acquire another to reduce competition. If so, prices can be increased and monopoly rents obtained. However, mergers that reduce competition may be challenged by the US Department of Justice and the Federal Trade Commission.
Diversificación
A cash rich company may use the cash for acquisitions rather than to pay it out as dividends. A frequent argument for this is that it reduces the investor's risk in the company, thus achieving diversification. However, investors can diversify on their own, likely more easily and cheaply than can the company.
After mentioning so many possible sources for synergy, in practice, what are the gains or losses from acquisitions? According to a study by Jensen and Ruback, shareholders earn 30% abnormal returns for successful tender offers. In general, successful takeovers lead to gains for shareholders of both firms, but those of the target firm obtain substantially more; for unsuccessful takeovers, shareholders on both sides lose.
9.3 Tactics which deter unfriendly takeovers
Many takeovers are agreed upon by both parties. These are called friendly takeovers . But there are also many that go over the management directly to shareholders. These are hostile takeovers . They can be done by a proxy fight . seeking the right to vote someone else's shares in a shareholders' annual meeting. Alternatively, the acquirer can make a tender offer directly to the shareholders. The management of the target firm may advise its shareholders to accept the tender or it may attempt to fight the bid. This process resembles a complex game of poker, playing under the rules set largely by the Williams Act of 1968 and by the courts. What are the strategies the management can take to fight the battle?
Pac-man Defense
White Knight
Lockup Defense
Scorched Earth Defense
Golden Parachutes
Poison Pills
Greenmail
Create an Antitrust Problem
Change the state of incorporation
Stalling tactics
Shark repellent charter amendements
Dual class recapitalization
Of course, the best method to prevent an unfriendly takeover to take actions to maximize shareholder value such as accepting positive NPV projects and running the corporation as efficiently as possible. Indeed, the benefit of an unfriendly takeover is often to purge the inefficient management. Any of these antitakeover tactics could destroy shareholder value if they are used to prolong the tenure of low quality management.
Expresiones de gratitud
Some of the material for this lecture is drawn from Richard Ruback's note, "Applications of the Net Present Value Rule" and Guofu Zhou's "Capital Budgeting".
Facebook Inc. Cl A FB (U. S. Nasdaq)
P/E Ratio (TTM) The Price to Earnings (P/E) ratio, a key valuation measure, is calculated by dividing the stock's most recent closing price by the sum of the diluted earnings per share from continuing operations for the trailing 12 month period. Earnings Per Share (TTM) A company's net income for the trailing twelve month period expressed as a dollar amount per fully diluted shares outstanding. Capitalización de Mercado Refleja el valor de mercado total de una empresa. Market Cap is calculated by multiplying the number of shares outstanding by the stock's price. Para las empresas con múltiples clases de acciones comunes, la capitalización de mercado incluye ambas clases. Shares Outstanding Number of shares that are currently held by investors, including restricted shares owned by the company's officers and insiders as well as those held by the public. Público Float El número de acciones en manos de los inversores públicos y disponibles para el comercio. Para calcular, comience con el total de acciones en circulación y reste el número de acciones restringidas. El stock restringido es típicamente el emitido a los iniciados de la compañía con límites en cuándo puede ser negociado. Dividend Yield A company's dividend expressed as a percentage of its current stock price.
Key Stock Data
P/E Ratio (TTM)
EPS (TTM)
Market Cap
Shares Outstanding
Public Float
rendimiento
FB has not issued dividends in more than 1 year.
Latest Dividend
Ex-Dividend Date
Shares Sold Short The total number of shares of a security that have been sold short and not yet repurchased. Cambiar de último cambio de porcentaje de interés corto del informe anterior al informe más reciente. Los intercambios reportan intereses cortos dos veces al mes. Porcentaje de flota Posiciones cortas totales en relación con el número de acciones disponibles para el comercio.
Short Interest (02/29/16)
Shares Sold Short
Change from Last
Percent of Float
Money Flow Uptick/Downtick Ratio Money flow measures the relative buying and selling pressure on a stock, based on the value of trades made on an "uptick" in price and the value of trades made on a "downtick" in price. La relación up / down se calcula dividiendo el valor de los oficios uptick por el valor de los oficios downtick. Flujo neto de dinero es el valor de las operaciones de uptick menos el valor de las operaciones downtick. Nuestros cálculos se basan en cotizaciones exhaustivas y diferidas.
Stock Money Flow
Uptick/Downtick Trade Ratio
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Where Should I Stash $50,000?
I have to meet a few of Mrs. RB40’s conditions before I can quit my corporate job. One of them is for us to save $50,000 in cash . (I negotiated down from 100k because I really think that is way too much cash.) We’ve been working on it for a while and we finally made it this month!
We have been diligently socking away my paycheck every month into the savings account at our credit union. The interest rate on our saving account is 0.25%. We’ll get only $125 of interest per year if we keep the money at our credit union. This is quite a bit lower than inflation and I thought we should find a better alternative.
The main criteria we have for this $50,000 is to keep it liquid. If we need to use some of this, we need to be able to get it in a week at the most. With this criteria, we eliminated pretty much all investments. Here are some other choices.
Stash it under the mattress – not a good idea. The bed will be lumpy and uncomfortable. Nobody will be happy with that.
Keep it at our credit union. This is not a bad choice for a saving account, but the interest rate is just not good enough for a big stash. This option gives the maximum flexibility.
Put it in an online bank. A few banks has around 1% interest rate. That’s not bad.
Build a CD ladder. This is probably the safest way to stash the money and get a bit more interest than the saving account.
I can open a saving account in Thailand and get 2.5% on 6 month CD. Although, the currency exchange fee will cut into the gain and the exchange rate is not great at this time. Perhaps I need to look into this further.
Readers suggested option – I-bonds @ 3% interest rate and a pretty low penalty (3 months interest.)
Any suggestions? Keep in mind, this amount cannot go down and needs to be liquid, so no gold. stock, or bonds.
I’m leaning toward building an I-bonds ladder.
The classic way to build a CD ladder is to break up $50,000 in to 5 pieces. Then you use $10,000 to buy 1 year CD, another $10,000 to buy 2 years CD, and so on. After one year, then you can collect the money from the 1 year CD and use that to buy a 5 year CD. Eventually, you will maximize the interest rate and have penalty free access to some of your money every year. You can do the same with I-bonds.
CD rates are also very low at this point. It’s not much better than the online saving account and I don’t think it’s really worth it right now.
Open an Online Saving Account with good interest rate
After over a year of not having a full time job, we haven’t had to dip into our $50,000 cash saving. I reallocated this cash toward my dividend portfolio and I’m keeping $20,000 an online Saving account. The dividend portfolio is better for the long term because we’ll get the dividend and the long term growth from the stock which is currently much better than 1%. The stock market is volatile, but our investment horizon is still about 20 years so we have plenty of time to recover from a set back.
If you need help keeping track of your finances, try using Personal Capital to manage your budget and net worth. It can help you keep track of your income, expenses, and net worth, all in one place. Personal Capital is geared for investors and has many great tools. See my review of Personal Capital and how they helped me reduce what I’m paying in investment fees .
Congratulations on socking away 50K. Other then that I have no other advice to give. This is something I have been pondering myself and still have no clue. I know that when we reach our efund goal I don’t want to keep that amount just in our savings, I thought a cd ladder would be a good option, but even those rate are nothing to get excited over. I guess it’s better than burying it in your backyard.
retirebyforty January 20, 2012, 4:28 am
That’s true. Those rates are very low historically. Hopefully they will come up at some point.
Another Reader January 20, 2012, 4:24 am
In your shoes, I would not consider tying up 60 percent of my “liquid” savings for 3, 4, and 5 years to get a marginally better yield over the lowest interest rates in history. If I needed the money, the penalty would cancel the benefit of the higher rate. In addition, interest rates will go up as the economy improves.
Instead, I would put the $50,000 in money market and’or savings accounts at the institution or institutions with the highest rates. Once CD interest rates improve to an acceptable level, factoring in alternative cash investments, I would look to creating a mix of money market accounts and shorter term CD’s. By shorter term I mean 6 to 18 months. This $50,000 is meant as an emergency cushion/reserve and the duration of any investment should match the intended purpose.
CD ladders are meant for investments, not reserves. In your shoes, I would shoot for that other $50,000 in reserves and have that portion tied up in a one to five year ladder. You might take a look at I-bonds for the longer terms, as you get the inflation protection and the penalty is less if you hold them for several years.
retirebyforty January 20, 2012, 4:39 am
That is good advice about reserves. Our reserves is normally 15-20k and we haven’t had to dip into it much over the years. That’s why I thought 20k in saving would be fine, but with a big change like quitting the corporate job, it might be wise to keep 50k in saving for at least a couple of years. The problem is the rate will be low for 2 more years as the Fed announced. I’ll take a look at TIPS. Thank you for your input.
Before we bought our new home, I was stashing money away in CD’s similar to the ladder technique. Need to get back to it and start building up the stash again.
Another Reader January 20, 2012, 4:43 am
Una cosa más. I’m not sure how you are accounting for the rental property reserves. With three rental properties, including a 4-plex, you need solid cash reserves. If your reserves for the rentals are part of the $50,000, you need to save more.
Having owned rentals for a long time, I have watched the operating costs, especially the cost of capital inprovements, more than double in the last 10 years. The cost of a roof today, especially on that 4-plex, can wipe out a big chunk of your $50,000. In your shoes, I would take a hard look at the capital improvements likely to be needed in the next five and ten years, and figure out what they would cost today. Then add in 5 to 10 percent a year in price increases, and estimate what you will need to reserve. Given the current returns on cash, that $100,000 looks like a good number to me.
retirebyforty January 20, 2012, 8:33 am
You’re right about that. The rental reserve is part of the 50k. The 4 plex is in a relatively good shape and we fixed quite a few things last year including the roof. It should be good for at least another 5 years, probably 10 actually. From the inspection report, there are only a few things left to fix this year. Still, it’s probably best to increase the reserve up to at least 70k. I’m taking profit on some large cap stocks so I can redirect the money to the reserve in a month or two. Again, I really appreciate your input. ¡Gracias!
Another Reader January 20, 2012, 9:44 am
A lot of things that were fine at the time a property was inspected will go wrong, even in the first five years. Make sure you budget for capital improvements, including furnaces/heat pumps. hot water heaters, appliances, carpet, tile, interior paint, etc. If you do not have experience replacing these items, do some research to find out what they will cost installed. You now have six rental units, and all of them will need capital improvements in the years after you retire. $50,000 will NOT be enough for your needs and the needs of the rental properties, I assure you. $70,000 may not be enough, either. More homework is needed to estimate what you need.
Most financial planners recommend three years of living expenses in cash or cash equivalents at retirement to insulate you from having to tap into your paper assets when the financial markets are down. Your wife’s job is secure, but you need to insure against her disability or death if you want to count her income during your retirement. As long as her income is insured, you can reduce the cash hoard needed. However, you must ADD the reserves for the rentals.
Remember, most of your readers are not real estate investors. Only other experienced real estate investors in your local market and your own research can help you estimate the amount of reserves you will need for your rental properties. Do the homework and be a lot more confident when you decide to take the plunge.
retirebyforty January 20, 2012, 3:47 pm
All good advice. I’m still going to make some money online or in some other way so we are not planning to dip into this saving unless it is an emergency. Our cash flow should be positive even after I quit my corporate job. I’ll do some research and probably beef up the reserve as you suggested. We are not planning to tap into the assets at all until my wife retires. I’ll check on her insurance.
I know savings account rates are low right now, but I really don’t think the CD rates are high enough to make up for locking up your capital. If I were you, I would keep the 50k in your savings account, especially if you want to add more to your dividend stocks.
Congrats on saving $50k! I’m impressed.
retirebyforty January 20, 2012, 8:34 am
Gracias por tu aportación. I’ll add to the dividend stocks from other sources. I’m liquidating a few growth stock holding so I can redirect the money to the dividend portfolio or add to the reserve. You’re right about the low CD rate, that’s why I’ve been putting it off.
Joe, while I completely understand wanting to put it in your dividend portfolio (as you said they are doing MUCH better), I made the decision to keep it separate too. I think it is awesome you guys set this goal BTW.
While I’m not personally a big fan of CDs, they are doing a lot better than most interest-earning saving accounts. Putting a portion in them and doing the ladder would certainly be reasonable IMHO.
retirebyforty January 20, 2012, 8:35 am
It’s not easy to watch the emergency fund sits around and not doing much, but we need it for emergencies. Glad to hear you’re doing the same.
Greg January 20, 2012, 6:10 am
Ally’s CDs have an early withdrawal penalty of only 60 days. Break your cash into 5 different 5 year CDs and there will only be a small penalty for accessing a portion on your cash while earning a good APY.
retirebyforty January 20, 2012, 8:36 am
That’s a good idea. I’ll check into that. Maybe I can put some in Ally and some in PenFed. ¡Gracias!
We won’t be able to meet the requirements. We use the cards less than 12 times a month, that’s the main sticking point. Gracias.
I would avoid the Thai account unless you know enough to evaluate the Thai political situation and associated risk. I consider myself knowledgeable on bonds, and I wouldn’t touch that without consulting an expert.
I think the basic fact is that nothing you do that’s liquid will out-run inflation without taking on risk. The 13 week T-bill is about 200 basis points below measured CPI inflation – that says in this environment there’s too many people chasing safety, so you just can’t win. But since you can’t quit the game either I’d probably just buy some short term CDs at your bank or something. I’d avoid money markets since I think the risk of a Euro-bank default is a lot more than zero at the moment.
retirebyforty January 23, 2012, 10:21 am
I don’t mind having some money in Thailand since I have a lot of families there. I’ll check with them, but I don’t think the political instability had much effect on the banks. You’re right about taking on risk with this money. I’d rather have smaller interest payment than take on a lot of risk.
Bruce January 23, 2012, 9:53 am
Thailand, that sounds so risky.
Have you ever thought about australia, they are paying prime interest right now, and the political situation is fine. you get 4.5% in a regular bank account. (not even a savings type)
retirebyforty January 23, 2012, 10:10 am
Yes, I thought about Australia, but I couldn’t find a way to open an account there. From my research, you have to be a citizen or resident to open an account. My aunt lives there, but I don’t know if I want to send her $50k.
Wow congrats. This is awesome.
I would pick something short term. You don’t want to lock that money in in case you want it for something. I would do something like ING where you can make a few extra dollars interest and have access to it ASAP if you wanted.
EconomicallyHumble. com January 24, 2012, 9:26 am
¡FELICITACIONES! thats a huge step. I like the idea of a CD ladder, though the rates right now may not be as good as your ING Account and the effort may not be with the interest.
Judith January 24, 2012, 10:54 am
I advocate buying real estate. But second buy stock not for appreciation but for Dividends. You need careful research. With the market down buying for the dividends is a great idea.
If you’re eligible, Ally Demand Notes offer a higher rate of return and access to all of your money at all times. http://www. demandnotes. com
Newlyfrugal January 26, 2012, 1:28 pm
I just stumbled onto your article today. I see that at least one poster suggested Rewards Checking Account but mentioned your aversion to them. May I suggest that you take a closer look at RCAs? I was in a similar situation as yours and decided to keep my $50k in an RCA. You can go to checkingfinder. com, enter your zip code, and see the list of community banks/credit unions that offer high interest rates.
This is how I found Centera Bank, which requires me to receive online statements, do one ACH transaction, and 10 debit transactions (used as credit card) per cycle. I make a nominal $5 ACH payment to a credit card. As for 10 debit transactions, I break up my purchases at CVS or the grocery store, or I buy several packets of gum or canned food.
If I meet all requirements, I get 3.01% interest (used to be 4.01% five months ago) on deposit up to $25k. I get .55% on deposits beyond $25k. I opened two RCAs with Centera, one in my name and one in my spouse’s name. So we get 3.01% on the total of $50k. In each account, I keep $25,200 or so. This way, I don’t fall below $25k when I make the ACH transaction or 10 debit purchases. My money is entirely liquid and I can add or withdraw at will. My interest last month was $52 and $54 for each RCA account, so a total of $106 per month.
After putting $50k in Centera, I put the rest of my liquid savings in Ally, whose online savings account and money market account each offer .84% (used to be .89% a week ago.) The savings account and MMA each allow up to six free withdrawals per month. I pay all our bills with a cashback rebate credit card, then at end of the month, I pay the CC online with my Ally account. I use Ally as intermediary to move money from my Centera bank to my local bank and other banks as needed.
I have $50k in Ally at .84%. I am considering putting some of this in No Penalty CD for 11 months or in regular CD for 12 months. The penalty for early withdrawal is only 60 days. I doubt we will need to withdraw early because we have funds in our Centera accounts. If you need $100k in liquid assets, you might try what we are doing ($50k in RCA, $50k in Ally.)
Make sure you take care of long term investments also; we have IRA and regular accounts at Vanguard and Schwab. This money will stay there for 20+ years to ride out any market fluctuations. Good luck to you and your family. Hope everything works out.
retirebyforty January 26, 2012, 4:36 pm
That’s good advice. I’ll look into it. It’s just a lot of effort on our part to meet the requirement and I’m sure we’ll slip up after a couple of months.
lholts January 28, 2012, 5:51 pm
Until this year, I was buying muni bonds. And, getting 5% return. Haven’t had much luck getting them recently; they’re just not around so much! Now, I’m looking at utility stocks that pay good dividends. You may not get huge equity gains (or losses) but you can score 5%+ with PP & L, First Energey, etc. Good luck! And congrats!
retirebyforty January 28, 2012, 11:02 pm
I like the utility stock idea, but I put those in my after tax stock account. ¡Gracias!
That is awesome that you have amassed such a nice cushion. I have been looking for alternatives for our savings in ING also. I have thought about a CD ladder but did not like their rates. I did not realize you could join Pen Fed so easily. I will have to look into joining there. Gracias por la info.
You have so many great ideas on retiring abroad – I think that a separate post regarding “How I would invest $50k into Retiring Abroad” is in order! Great article – ¡Gracias!
Debbie February 1, 2012, 7:58 am
Hi RB40, I found a checking account at First Community Credit Union that pays 2.5 on up to $25,000.00. Their Money Market/Management is much lower. I am not sure why they want 25 in a checking account with such a high rate, but hey it pays and that’s all I care. There are a few stipulations. Off the top of my head, monthly, you must have at least one auto payment to the account, 12 debit card transactions, enroll in e statements there is something else, but I can’t remember. I had already done all these things and it was silly for me not to take advantage of the rate. Thought it was something you could check out. And not to mention, it’s totally fluid. If you do not match the criteria nothing happens you just don’t qualify for the 2.5.
retirebyforty February 1, 2012, 9:47 am
I have seen those too and I really need to check them out. We won’t meet all the conditions without some changes, but it might be worth it. 2.5% is pretty good.
Dino February 7, 2012, 9:20 pm
Rb40 – My suggestion is considerably different for your $50k. Place it in a tax-free municipal bond fund with Vanguard, specifically the Limited Term TE Bond Fund or if you want a little higher rate and risk, the Intermediate Term Fund. In this scenario, you earn higher interest rates that are federally tax exempt, you have access to your money via free checks to write for $250 and above, and you collect monthly dividends PLUS the power of compounding. You can also add to your holdings monthly via automated electronic transfer payments at no charge, while VGs fees of .20 percent are the lowest in the industry. & # 8211; Dino
Tommy April 13, 2012, 1:05 pm
I like that suggestion and will look into it as I have my work 401K there and am thinking of moving 50K of my outside T. Rowe IRA there to get a “Free” Financial Plan.
retirebyforty April 13, 2012, 3:24 pm
Beware of “free” financial advisers. They are just glorified sales people. Take a long look at what they want you to buy and compare them to Vanguard funds.
Tommy April 14, 2012, 5:09 am
The plan is from Vanguard made of Vanguard funds. I am going to a T. Rowe center to talk with a planner (he is not a CFP) there today just to hear what he has to say before moving the 50K to Vanguard for their plan (prepared by a CFP).
I was almost in the same situation as you. I wanted to pay off my house as well as save upwards of $40k
in order to quit my day job. I had hit this goal about 3 years ago. I just got fed up with my $40k making only 2% tops, so I decided to just purchase more rentals in my area. I was able to find a lender that would do 10% down for a lower interest rate for the next 5 years.
Quick story short, I have 4 total rentals now (looking to add more) and have invested about 25k of my 40k and the returns have been very nice. I saw that you have a rental, but this may be something you want to look into just to throw a little bit of that money in
retirebyforty February 10, 2012, 10:13 pm
I have a 4 plex, a rental home, and a rental condo. I’m still looking around a bit, but I haven’t found any good deals lately.
Yep February 12, 2012, 7:43 am
All the financial advisers think I’m crazy, but I’ll tell you what I did in your situation. Time will tell whether I was right or not. Instead of buying a CD at less than a percentage point, I “refinanced down” my mortgage. I had a little more money than you, so I was able to get a 10-year loan for about what we paid for a 30 year. The principal owed is dropping surprisingly quickly. My logic was that if I can only earn 1% or less, but I’m paying 3-4% interest, I’ll save massively by paying off the loan earlier and enjoying some additional freedom. To protect myself from sudden cashflow issues (I also have a 4plex that could cause a sudden expense), I opened a line of credit on my house (I have lots of equity since I just gave the bank lots of money), however I don’t have a payment on it unless I take a draw so my cashflow stays good.
Jesse Frei March 8, 2012, 8:44 pm
I’m not sure what Prosper does… but lendingclub. com has an online trading platform where you can sell the notes you own at a discount to other investors. Typically to attract investors you sell it for a discount, I’ve done it a few times and it seems to work rather well. This is one way the investment can still remain liquid.
Jerome March 28, 2012, 3:12 am
I would opt for a dividend portfolio. Chances that you suddenly need all of your buffer are very small, so it is in my opinion acceptable to take that extra risk and make nice few extra dollars on the side. A mixture of 25k cash in a bank-account and 25 k in dividend is also a good option and a bit more secure on the short run.
retirebyforty March 28, 2012, 9:00 pm
It would be nice to have the additional dividend income.
Gina September 3, 2012, 8:08 am
I have a Cd at Penfed, and the reason I like it is I never think about it! I don’t drive by the bank, it is out of sight out of mind. I have three more years of 4.0% CD. I am starting a CD ladder at ING, only cause I have available $500.00 amounts at a time.
My husband wants to retire early, but is no where near prepared as you guys. We are so looking forward to it, but the process to get there is hard!
retirebyforty September 3, 2012, 6:16 pm
4% is really great. I’ll add some money to the CD when the interest rate is higher. The current rate is just too low for me.
Kevin November 24, 2012, 1:54 pm
$50,000 in cash, in my humble opinion, is not the best option. Inflation will erode the value of that money over time. I have a 401(k) and Roth IRA, but like you, I also have taxable liquid savings. I use the permanent portfolio for my taxable account: 25% cash (SHY) 25% gold (GLD) 25% Treasuries (TLT) 25% Stocks (VTI) This way, I have a quarter of my money in liquid cash for emergencies, while the remainder can always be working for me. If you look at the volatility and max drawdown of this allocation it is actually quite steady and safe, with returns that rival a 100% allocation to stocks. Rebalance semi-annually and you are good to go! I love seeing my taxable savings grow alongside my retirement. In fact, I’m considering allocation my entire bankroll this way. If you don’t know about the permanent portfolio, please Google it.
retirebyforty November 25, 2012, 7:45 am
I agree, but I want to keep the cash for now because I don’t work full time anymore. If our finance work out, then in about a year I would reduce that position. I’ll do some research on the permanent portfolio. I don’t like GLD though.
Patrick & Sharon February 6, 2013, 4:48 pm
There are many high-yield credit union checking accounts that offer rates @ 3 0/0 or higher nationwide (long term, not promo rates) up to $25K per account. We use Lake Michigan Credit Union that paid us $900 in interest in 2012 ($30k in 2 accts paying 3 0/0 w/easy-to-meet requirements).
retirebyforty February 7, 2013, 8:55 am
My credit union is on that list. I rarely use the debit card though so we won’t hit the minimum requirement.
Joek April 5, 2013, 5:38 pm
Real inflation rate on US currency now exceeds 3 percent and growing. Official US government. Inflation rate calculation is inaccurate and manipulated.
Our checking account at the credit union we use is paying 3%
retirebyforty May 21, 2013, 3:37 pm
You probably has to do a few things to get that 3% though. I can’t do direct deposit (no jobs) and I use the credit card about once a week.
How much of that $50k nut do you really need for a rainy day/emergency fund (or do you already have a separate allotment for that)?
If you have a time horizon that’s a couple years I’d take most of that money and park it into an S&P500 index fund, or if you’re really conservative, an inflation-protected bond fund like VIPSX. Sure, your principal may dip below your original amount, but I’d take the short term volatility over the less-than-inflation savings and CD rates – with the latter you’re locked in or are hit with a penalty for withdrawal anyway.
retirebyforty September 16, 2013, 10:50 pm
I just wanted to give the missus some peace of mind for the first year. Now I know we don’t need that much saving so I’m going to invest most of this saving this year.
TropicalTwo24 October 12, 2013, 7:40 am
You can do like I did, make your investments cover themselves. I have four rentals and instead of taking my emergency cash and stashing it in a bank account or cd’s I invested it in stocks. To cover unexpected emergencies I took out a HELOC (home exquity) loan I found on the internet (Third Fed Savings/loan) that is matched to the prime rate, been 2.99% for 3 years now, no closing, etc. I’m making over 10% on my investments in stocks. I have not had to tap it for an emergency but if I did I would pay the 2.99% and write off the interest on my taxes too. If the interest rate increases for this HELOC to an uncomfortable level in the future – which it will, I then will start building cash reserves. Works for me and my money too.
TropicalTwo24 October 12, 2013, 7:53 am
Correction, the HELOC is a Home equity line of credit, not a loan. You only use it if you need it (check book) and only pay the interest (tied to a mortgage/tax write off) on what you have borrowed. Good peace of mind for those that are responsible, need an emergency account, and want their money working for them. The bank doesn’t care what you spend it on either. ie. I found a foreclosure property that was a steal two years ago and bought it for 50k from this account, the bank considered it a cash deal, I wrote a check and now own it. It produces new positive cash flow every month now, I will have the original loan (50k) paid of in 3 years… Keep that money working and not you.
Michael November 30, 2013, 5:30 am
For those out there still building their nest egg and able to handle higher risk - I ended up placing most of our liquid assets in a brokerage account investing in morningstar five star rated mutual funds. With the brokerage acct we can access the money in about 7 d if needed. I don’t know if I’d reccommend to those already retired. We limit 10k of emergency money to savings +checking since the interest rates are too low also CDs feel too restrictive for the low returns. Having the brokerage acct helps us to keep our liquid assets separate from daily expense accts and also makes it easy to move the 5.5k to our roth accts every year.
Chris Boyles December 3, 2013, 5:52 pm
First off, I know absolutely nothing about investments. I read the thread and most things confused me. I am 58 years old and came into a windfall 0f 50k, so googled what to do and came to this place. I am disabled and draw 5k per month. I have full coverage for medical and prescriptions from the VA. I don’t own a home, I rent, $400.00 per month. I only have 4k in debt for a car, with one paid for. I have no other debt. I have 5k in my checking and 1k in a money market secured visa for ease of use. Vivo solo. I also have 10k whole life paid for by the VA.
I think I could do a better job with the 50k in my savings, but am afraid to invest due to the current worldwide financial crisis. Any suggestions on how I can safely get a better return on my savings would be greatly appreciated.
retirebyforty December 4, 2013, 9:27 am
You might want to talk to a financial adviser. Pick one that charge a one time fee and not an ongoing fee. If I was in your situation, I’d probably play it safe and build an iBond ladder. Invest $5-10,000 per year in iBond with the treasury department. After a 5 years you will be able to withdraw it without penalty. You can’t withdraw it in 12 months so you have to be sure you don’t need that money in that time period. The rate is better than money market, but not much. It is very secure though.
Chris Boyles December 8, 2013, 7:00 pm
Thanks, I check into the iBond.
26 U. S. Code § 83 - Property transferred in connection with performance of services
Property transferred in connection with performance of services
(a) General rule If, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of —
the fair market value of such property (determined without regard to any restriction other than a restriction which by its terms will never lapse) at the first time the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, over
the amount (if any) paid for such property, shall be included in the gross income of the person who performed such services in the first taxable year in which the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever is applicable. The preceding sentence shall not apply if such person sells or otherwise disposes of such property in an arm’s length transaction before his rights in such property become transferable or not subject to a substantial risk of forfeiture.
(b) Election to include in gross income in year of transfer
(1) In general Any person who performs services in connection with which property is transferred to any person may elect to include in his gross income for the taxable year in which such property is transferred, the excess of —
the fair market value of such property at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse), over
the amount (if any) paid for such property.
If such election is made, subsection (a) shall not apply with respect to the transfer of such property, and if such property is subsequently forfeited, no deduction shall be allowed in respect of such forfeiture.
An election under paragraph (1) with respect to any transfer of property shall be made in such manner as the Secretary prescribes and shall be made not later than 30 days after the date of such transfer. Such election may not be revoked except with the consent of the Secretary.
(c) Special rules For purposes of this section —
(1) Substantial risk of forfeiture
The rights of a person in property are subject to a substantial risk of forfeiture if such person’s rights to full enjoyment of such property are conditioned upon the future performance of substantial services by any individual.
(2) Transferability of property
The rights of a person in property are transferable only if the rights in such property of any transferee are not subject to a substantial risk of forfeiture.
(3) Sales which may give rise to suit under section 16(b) of the Securities Exchange Act of 1934 So long as the sale of property at a profit could subject a person to suit under section 16(b) of the Securities Exchange Act of 1934, such person’s rights in such property are —
subject to a substantial risk of forfeiture, and
For purposes of determining an individual’s basis in property transferred in connection with the performance of services, rules similar to the rules of section 72(w) shall apply.
(d) Certain restrictions which will never lapse
In the case of property subject to a restriction which by its terms will never lapse, and which allows the transferee to sell such property only at a price determined under a formula, the price so determined shall be deemed to be the fair market value of the property unless established to the contrary by the Secretary, and the burden of proof shall be on the Secretary with respect to such value.
(2) Cancellation If, in the case of property subject to a restriction which by its terms will never lapse, the restriction is canceled, then, unless the taxpayer establishes —
that such cancellation was not compensatory, and
that the person, if any, who would be allowed a deduction if the cancellation were treated as compensatory, will treat the transaction as not compensatory, as evidenced in such manner as the Secretary shall prescribe by regulations,
the excess of the fair market value of the property (computed without regard to the restrictions) at the time of cancellation over the sum of —
the fair market value of such property (computed by taking the restriction into account) immediately before the cancellation, and
the amount, if any, paid for the cancellation,
shall be treated as compensation for the taxable year in which such cancellation occurs.
(e) Applicability of section This section shall not apply to —
a transaction to which section 421 applies,
a transfer to or from a trust described in section 401(a) or a transfer under an annuity plan which meets the requirements of section 404(a)(2),
the transfer of an option without a readily ascertainable fair market value,
the transfer of property pursuant to the exercise of an option with a readily ascertainable fair market value at the date of grant, or
group-term life insurance to which section 79 applies.
(f) Holding period
In determining the period for which the taxpayer has held property to which subsection (a) applies, there shall be included only the period beginning at the first time his rights in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier.
(g) Certain exchanges If property to which subsection (a) applies is exchanged for property subject to restrictions and conditions substantially similar to those to which the property given in such exchange was subject, and if section 354, 355, 356, or 1036 (or so much of section 1031 as relates to section 1036) applied to such exchange, or if such exchange was pursuant to the exercise of a conversion privilege —
such exchange shall be disregarded for purposes of subsection (a), and
the property received shall be treated as property to which subsection (a) applies.
(h) Deduction by employer
In the case of a transfer of property to which this section applies or a cancellation of a restriction described in subsection (d), there shall be allowed as a deduction under section 162, to the person for whom were performed the services in connection with which such property was transferred, an amount equal to the amount included under subsection (a), (b), or (d)(2) in the gross income of the person who performed such services. Such deduction shall be allowed for the taxable year of such person in which or with which ends the taxable year in which such amount is included in the gross income of the person who performed such services.
References in Text
Section 16(b) of the Securities Exchange Act of 1934, referred to in subsec. (c)(3), is classified to section 78p(b) of Title 15. Commerce and Trade.
1990—Subsec. (yo). Pub. L. 101–508 struck out subsec. (i) “Transition rules” which read as follows: “This section shall apply to property transferred after June 30, 1969. except that this section shall not apply to property transferred—
“(1) pursuant to a binding written contract entered into before April 22, 1969 ,
“(2) upon the exercise of an option granted before April 22, 1969 ,
“(3) before May 1, 1970. pursuant to a written plan adopted and approved before July 1, 1969 ,
“(4) before January 1, 1973. upon the exercise of an option granted pursuant to a binding written contract entered into before April 22, 1969. between a corporation and the transferor requiring the transferor to grant options to employees of such corporation (or a subsidiary of such corporation) to purchase a determinable number of shares of stock of such corporation, but only if the transferee was an employee of such corporation (or a subsidiary of such corporation) on or before April 22, 1969. or
“(5) in exchange for (or pursuant to the exercise of a conversion privilege contained in) property transferred before July 1, 1969. or for property to which this section does not apply (by reason of paragraphs (1), (2), (3), or (4)), if section 354, 355, 356, or 1036 (or so much of section 1031 as relates to section 1036) applies, or if gain or loss is not otherwise required to be recognized upon the exercise of such conversion privilege, and if the property received in such exchange is subject to restrictions and conditions substantially similar to those to which the property given in such exchange was subject.”
1986—Subsec. (e)(5). Pub. L. 99–514 struck out “the cost of” before “group-life insurance”.
1983—Subsec. (c)(3). Pub. L. 97–448 substituted “Securities Exchange Act of 1934” for “Securities and Exchange Act of 1934” in heading and text.
1976—Subsec. (b)(2). Pub. L. 94–455, § 1901(a)(15). struck out “(or, if later, 30 days after the date of the enactment of the Tax Reform Act of 1969)” after “after the date of such transfer”, and § 1906(b)(13)(A), “or his delegate” after “Secretary” wherever appearing.
Subsec. (d)(1), (2)(B). Pub. L. 94–455, § 1906(b)(13)(A). struck out “or his delegate” after “Secretary”.
Effective Date of 2004 Amendment
Effective Date of 1986 Amendment
Amendment by Pub. L. 99–514 effective, except as otherwise provided, as if included in the provisions of the Tax Reform Act of 1984, Pub. L. 98–369, div. A. to which such amendment relates, see section 1881 of Pub. L. 99–514. set out as a note under section 48 of this title .
Effective Date of 1984 Amendment
Effective Date of 1983 Amendment
Amendment by Pub. L. 97–448 effective, except as otherwise provided, as if it had been included in the provision of the Economic Recovery Tax Act of 1981, Pub. L. 97–34. to which such amendment relates, see section 109 of Pub. L. 97–448. set out as a note under section 1 of this title .
Effective Date of 1981 Amendment
“The amendment made by subsection (a) [amending this section] and the provisions of subsection (b) [set out below] shall apply to transfers after December 31, 1981 .”
Effective Date of 1976 Amendment
“The amendments made by subsections (a) and (c) [amending sections 402. 403. and 404 of this title] shall apply to taxable years ending after June 30, 1969. The amendments made by subsection (b) [enacting this section] shall apply with respect to contributions made and premiums paid after August 1, 1969 .”
For provisions that nothing in amendment by Pub. L. 101–508 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Nov. 5, 1990. for purposes of determining liability for tax for periods ending after Nov. 5, 1990. see section 11821(b) of Pub. L. 101–508. set out as a note under section 45K of this title .
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of Pub. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989. see section 1140 of Pub. L. 99–514. as amended, set out as a note under section 401 of this title .
“(1) Notwithstanding subsection (c) of section 252 of the Economic Recovery Tax Act of 1981 [section 252(c) of Pub. L. 97–34. set out above], the amendment made by subsection (a) of such section 252 [amending this section] (and the provisions of subsection (b) of such section 252 [set out below]) shall apply to any transfer of stock to any person if —
such transfer occurred in November or December of 1973 and was pursuant to the exercise of an option granted in November or December of 1971,
in December 1973 the corporation granting the option was acquired by another corporation in a transaction qualifying as a reorganization under section 368 of the Internal Revenue Code of 1954 [now 1986],
the fair market value (as of July 1, 1974 ) of the stock received by such person in the reorganization in exchange for the stock transferred to him pursuant to the exercise of such option was less than 50 percent of the fair market value of the stock so received (as of December 4, 1973 ),
in 1975 or 1976 such person sold substantially all of the stock received in such reorganization, and
such person makes an election under this section at such time and in such manner as the Secretary of the Treasury or his delegate shall prescribe.
“(2) Limitation on amount of benefit.—
Paragraph (1) shall not apply to transfers with respect to any employee to the extent that the application of paragraph (1) with respect to such employee would (but for this paragraph) result in a reduction in liability for income tax with respect to such employee for all taxable years in excess of $100,000 (determined without regard to any interest).
“(3) Statute of limitations.—
If refund or credit of any overpayment of tax resulting from the application of paragraph (1) is prevented on the date of the enactment of this Act [ Oct. 22, 1986 ] (or at any time within 6 months after such date of enactment) by the operation of any law or rule of law, refund or credit of such overpayment (to the extent attributable to the application of paragraph (1)) may, nevertheless, be made or allowed if claim therefor is filed before the close of such 6-month period.
If the assessment of any deficiency of tax resulting from the application of paragraph (1) is prevented on the date of the enactment of this Act [ Oct. 22, 1986 ] (or at any time within 6 months after such date of enactment) by the operation of any law or rule of law, assessment of such deficiency (to the extent attributable to the application of paragraph (1)) may, nevertheless, be made within such 6-month period.”
Time for Making Certain Section 83(b) Elections
“In the case of any transfer of property in connection with the performance of services on or before November 18, 1982. the election permitted by section 83(b) of the Internal Revenue Code of 1986 [formerly I. R.C. 1954] may be made, notwithstanding paragraph (2) of such section 83(b), with the income tax return for any taxable year ending after July 18, 1984. and beginning before the date of the enactment of the Tax Reform Act of 1986 [ Oct. 22, 1986 if —
the amount paid for such property was not less than its fair market value at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse), and
the election is consented to by the person transferring such property.
The election shall contain that information required by the Secretary of the Treasury or his delegate for elections permitted by such section 83(b). The period for assessing any tax attributable to a transfer of property which is the subject of an election made pursuant to this section shall not expire before the date which is 3 years after the date such election was made.”
Property Subject to Transfer Restrictions To Comply With “Pooling-of-Interests Accounting” Rules
“For purposes of section 83 of the Internal Revenue Code of 1986 [formerly I. R.C. 1954], property is subject to substantial risk of forfeiture and is not transferable so long as such property is subject to a restriction on transfer to comply with the “Pooling-of-Interests Accounting” rules set forth in Accounting Series Release Numbered 130 ((10/5/72) 37 FR 20937; 17 CFR 211.130) and Accounting Series Release Numbered 135 ((1/18/73) 38 FR 1734; 17 CFR 211.135). "
Written determinations for this section
These documents, sometimes referred to as "Private Letter Rulings", are taken from the IRS Written Determinations page ; the IRS also publishes a fuller explanation of what they are and what they mean. The collection is updated (at our end) daily. It appears that the IRS updates their listing every Friday.
Note that the IRS often titles documents in a very plain-vanilla, duplicative way. Do not assume that identically-titled documents are the same, or that a later document supersedes another with the same title . That is unlikely to be the case.
Release dates appear exactly as we get them from the IRS . Some are clearly wrong, but we have made no attempt to correct them, as we have no way guess correctly in all cases, and do not wish to add to the confusion.
We truncate results at 20000 items. After that, you're on your own.
ACC 423 Final Exam
Martinez Company’s ledger shows the following balances on December31, 2012.
5% preferred stock - $10 par value. outstanding 22,720 shares $227,220
Common stock - $100 par value, outstanding 34,080 shares 3408,000
Retained Earnings 715,680
Assuming that the directors decides to declare total dividend in the amount of $302,176, determine how much each class of stock should receive under each of the conditions stated below. One years dividends are in arrears on the preferred stock.
(a) The preferred stock is cumulative and fully participating
S corporations and the “two-year” rule
AgDM Newsletter September 2012
When Subchapter S of the Internal Revenue Code was enacted in 1958, the income tax rates were significantly different than in 2012. In 1958, the top corporate federal income tax rate was 52 percent and the top individual rate was 91 percent. The S corporation concept gained popularity among small businesses and currently ranks as the most popular corporate structure in the United States.
Notwithstanding its popularity, the S corporation concept still embraces problem areas, perhaps the most notable of which is the fact that some S corporations pay unreasonably low salaries, reducing payroll taxes as earnings are removed as corporate distributions rather than wages and salaries. Another problem area is the ownership of S corporation stock by entities other than individuals. This article focuses on one of those problems, the “two-year” rule for S corporation stock ownership by some types of trusts after the death of an individual beneficiary.
Trusts permitted as shareholders
As originally enacted, Subchapter S limited eligible shareholders to those in a domestic corporation. which does not – (2) have as a shareholder a person (other than an estate) which is not an individual.” Over the years, that simple rule has been amended to allow certain trusts to be permitted shareholders –
A grantor trust (technically a trust under subpart E of Part I of subchapter J of Chapter 1 of the Internal Revenue Code) which is treated “. as owned by an individual who is a citizen or resident of the United States” immediately before the death of the deemed owner. and which continues in existence after such death, but only for the 2-year period beginning on the day of the deemed owner’s death”
A testamentary trust as transferee of stock under a will, “. but only for the 2-year period beginning on the day on which such stock is transferred to it”
A voting trust
An electing small business trust
For Subchapter S banks and depositary institutions, a trust which constitutes an individual retirement account including a Roth IRA until October 22, 2004
A qualified Subchapter S trust with only one beneficiary
Wholly owned subsidiaries
It is important to note that the first two categories – grantor trusts and testamentary trusts – are limited by the “two-year” rule – grantor trusts (for two years after death) and testamentary trusts (two years after the stock is transferred to the trust).
The “two-year” regla
The statute is clear as to the post-death period during which S corporation stock can be held by grantor trusts and testamentary trusts, although the provisions are not identical in terms of the period after death the stock can be held by the respective trusts. Both provisions use the term “but only for the 2-year period.” However, some have argued that the term during which trust ownership is allowed can extend beyond the two-year limit by invoking I. R.C. § 641. Regulations issued under that Code section state –
“The period of administration or settlement [of an estate] is the period actually required by the administrator or executor to perform the ordinary duties of administration. whether the period is longer or shorter than the period specified under the applicable local law for the settlement of estates. If the administration of an estate is unreasonably prolonged, the estate is considered terminated for Federal income tax purposes after the expiration of a reasonable period for the performance by the executor of all of the duties of administration.”
One question is whether the I. R.C. § 641 regulations trump the very specific language of I. R.C. § 1361(c)(2)(A) and have relevance to how long S corporation stock can be held after death in a grantor trust or testamentary trust. The regulations under I. R.C. § 641 were proposed and adopted in 1956, before the enactment of Subchapter S of the Internal Revenue Code, and neither section makes reference to the other provision. However, the I. R.C. § 1361 regulations do refer to I. R.C. § 641.
The regulations under I. R.C. § 1361(c)(2)(B) are ambiguous. Those regulations state that a grantor trust that continues in existence after the death of the deemed owner is an eligible shareholder “. but only for the 2-year period beginning on the day of the deemed owner’s death.” The regulation goes on to state “. a trust is considered to continue in existence if the trust continues to hold the stock pursuant to the terms of the will or trust agreement, or if the trust continues to hold the stock during a period reasonably necessary to wind up the affairs of the trust.” [Id.] Yet the preceding sentence from the regulations merely states that the trust “. is considered to continue in existence”. “if the trust continues to own stock, not that the shareholder is a permissible shareholder of an S corporation.” The fact that the regulations under I. R.C. § 1361 seemingly contradict the statute raises a question as to the validity of the regulations.
The consequences of violating the requirements of I. R.C. § 1361(c)(2)(A) can be severe – the S election is terminated inasmuch as the corporation ceases to be a “small business corporation.” Therefore, the prudent course would appear to be to follow the statutory language – do not allow trust ownership (grantor trusts and testamentary trusts) to continue beyond the two-year period.
Neil Harl, Charles F. Curtiss Distinguished Professor in Agriculture and Emeritus Professor of Economics, Iowa State University, Ames, Iowa, Member of the Iowa Bar, 515-294-6354, harl@iastate. edu
State Bank of India
State Bank of India
09 Mar 2016, 08:11AM IST
A quick turnaround in crude oil prices has again turned things on the head for global equity markets and risk-on trade. Más
A quick turnaround in crude oil prices has again turned things on the head for global equity markets and risk-on trade. And Goldman has just painted an even more depressing picture for crude. However, that should be good news for India's macros. Or is it? less
03 Mar 2016, 08:18AM IST
Amid widespread expectations that RBI may cut interest rates further, the IMF said the central bank may require a “tight. Más
Amid widespread expectations that RBI may cut interest rates further, the IMF said the central bank may require a “tight monetary stance for longer” as economies globally continue to get roiled. In China, the services PMI unexpectedly fell in February, signalling that the worries for the world economy are not over yet. less
29 Feb 2016, 06:22PM IST
Recapitalisation of state-run banks: The FM in his Budget announced to spend Rs 25,000 crore towards the recapitalizatio. Más
Recapitalisation of state-run banks: The FM in his Budget announced to spend Rs 25,000 crore towards the recapitalization of banks. less
25 Feb 2016, 03:54PM IST
"Sell SBI with a stop at about Rs 157-158 and we can look for a price target around Rs 144-145"
"Sell SBI with a stop at about Rs 157-158 and we can look for a price target around Rs 144-145"less
25 Feb 2016, 07:47AM IST
The Indian market is expected to open flat-to-higher. Here is a list of top fifteen stocks that are likely to be in focu. Más
The Indian market is expected to open flat-to-higher. Here is a list of top fifteen stocks that are likely to be in focus today. less
23 Feb 2016, 09:55AM IST
"Our focus would be banks like SBI which have got a larger amount of abilities to recover the loan"
"Our focus would be banks like SBI which have got a larger amount of abilities to recover the loan"less
19 Feb,2016, 08:29AM IST
With reference to earlier communication dated December 21, 2015 and in terms of Regulation 30 (2) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, State Bank of India has now informed BSE that the Bank on February 18, 2016 issued 30,000, Basel III compliant, Tier-ll b. Más
With reference to earlier communication dated December 21, 2015 and in terms of Regulation 30 (2) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, State Bank of India has now informed BSE that the Bank on February 18, 2016 issued 30,000, Basel III compliant, Tier-ll bonds in the nature of debentures, of face value of Rs.10,00,000/- each at par, with 10 year tenure, bearing 8.45% p. a. coupon and with call option after 5 years, aggregating to Rs.3,000 crores (Rupees three thousand crores) on private placement basis. less
18 Feb 2016, 10:26AM IST
Some of the companies may gain attention as government plans to increase thrust on road and railway infrastructure in fo. Más
Some of the companies may gain attention as government plans to increase thrust on road and railway infrastructure in forthcoming Union Budget. less
17 Feb 2016, 03:02PM IST
The S&P BSE Sensex gained over 150 points after slipping 100 points on Wednesday tracking mixed cues from global cues.
The S&P BSE Sensex gained over 150 points after slipping 100 points on Wednesday tracking mixed cues from global cues. less
17 Feb 2016, 07:50AM IST
The Indian market is likely to open higher. Here is a list of top twelve stocks that are likely to be in focus today.
The Indian market is likely to open higher. Here is a list of top twelve stocks that are likely to be in focus today. less
16 Feb 2016, 10:27PM IST
According to Bloomberg data, about 29 brokerages have given ‘buy’ call on SBI as they attribute the current performance. Más
According to Bloomberg data, about 29 brokerages have given ‘buy’ call on SBI as they attribute the current performance to cleaning-up of balance sheet. less
13 Feb 2016, 01:50PM IST
The SBI stock tanked 9 per cent during the week underperforming the benchmark Sensex, which declined 6.6 per cent. Compartir. Más
The SBI stock tanked 9 per cent during the week underperforming the benchmark Sensex, which declined 6.6 per cent. Shares of HDFC Bank, fell 8 per cent. less
11 Feb 2016, 03:44PM IST
Sensex plunged over 800 points tracking weak cues from other Asian and European markets and weak earnings from index hea. Más
Sensex plunged over 800 points tracking weak cues from other Asian and European markets and weak earnings from index heavyweights. less
Announces Q3 Results (Standalone & Consolidated) & Limited Review Report (Standalone) for the Quarter ended December 31. | Anuncio
11 Feb,2016, 01:07PM IST
News Body Follows.
News Body Follows. Menos
11 Feb 2016, 10:46AM IST
Shares of State Bank of India surged a little over 2 per cent in morning trade on Thursday ahead of its results for the. Más
Shares of State Bank of India surged a little over 2 per cent in morning trade on Thursday ahead of its results for the quarter ended December 31.less
11 Feb 2016, 08:36AM IST
In a chat with ET Now, Ajay Bagga, Market Expert, discusses what the trigger points are likely to be today
In a chat with ET Now, Ajay Bagga, Market Expert, discusses what the trigger points are likely to be todayless
04 Feb 2016, 08:48AM IST
In a chat with ET Now, CK Narayan, Growth Avenues Asset Advisors, says the NPA problem of banks is far from over and ban. Más
In a chat with ET Now, CK Narayan, Growth Avenues Asset Advisors, says the NPA problem of banks is far from over and banks are not clear on itless
02 Feb 2016, 12:01PM IST
Shares of banking, auto and real estate sectors turned choppy on Tuesday after the Reserve Bank of India (RBI) in its po. Más
Shares of banking, auto and real estate sectors turned choppy on Tuesday after the Reserve Bank of India (RBI) in its policy review maintained status quo on policy rates. The rate-sensitive stocks were trading mostly higher in the morning trade. less
28 Jan 2016, 03:17PM IST
Domestic banks are finding a bright spot in a home-buying spree in towns that has driven mortgage-loan growth to the fas. Más
Domestic banks are finding a bright spot in a home-buying spree in towns that has driven mortgage-loan growth to the fastest rate in 6 years. less
Shareholding for the Period Ended December 31, 2015 | Anuncio
25 Jan,2016, 12:45AM IST
State Bank of India has submitted to BSE the Shareholding Pattern for the Period Ended December 31, 2015. For more details, kindly Click here
State Bank of India has submitted to BSE the Shareholding Pattern for the Period Ended December 31, 2015. For more details, kindly Click here less
About State Bank of India
State Bank of India, incorporated in the year 1955, is a Large Cap company (having a market cap of Rs 143,689 Cr.) operating in Banks sector.
State Bank of India key Products/Revenue Segments include Interest & Discount on Advances & Bills which contributed Rs 112343.91 Cr to Interest Income (73.71% of Total Interest Income),Income From Investment which contributed Rs 37087.77 Cr to Interest Income (24.33% of Total Interest Income),Interest which contributed Rs 2460.27 Cr to Interest Income (1.61% of Total Interest Income),Interest On Balances with RBI and Other Inter-Bank Funds which contributed Rs 505.12 Cr to Interest Income (0.33% of Total Interest Income), for the year ending 31-Mar-2015. El Banco ha reportado un Activo Bruto No Activo (NPA Bruto) de Rs 0,00 Cr. (0.00% of total assets) and Net Non Performing Assets (Net NPAs) of Rs 0.00 Cr. (0.00% of total assets).
For the quarter ended 31-Dec-2015, the company has reported a Consolidate Interest Income of Rs. 39204.21 Cr. down -0.51% from last quarter Interest Income of Rs. 39405.42 Cr. and up 0.77% from last year same quarter Interest Income of Rs. 38905.91 Cr. La compañía ha divulgado el beneficio neto después de impuestos de Rs. 1374.02 Cr. En el último trimestre.
The company’s management includes Mr. A K Gupta, Mr. A N Appaiah, Mr. Ajit Sood, Mr. Ashwini Mehra, Mr. Badal Chandra Das, Mr. C R Sasikumar, Mr. Karnam Sekar, Mr. Krishna Mohan Trivedi, Mr. Lingaraj Mahapatra, Mr. M S Shastri, Mr. Mrityunjay Mohapatra, Mr. P K Gupta, Mr. P S Prakash Rao, Mr. Pallav Mohapatra, Mr. Prashant Kumar, Mr. Riten Ghose, Mr. Sanjay Kumar Magoo, Mr. Sudhir Dubey, Mrs. Rajni Mishra, Mrs. Varsha V Purandare, Dr. Urjit R Patel, Mr. B Sriram, Mr. Deepak I Amin, Mr. M D Mallya, Mr. Parveen Kumar Gupta, Mr. Rajnish Kumar, Mr. Sanjiv Malhotra, Mr. Sunil Mehta, Mr. Tribhuwan Nath Chaturvedi, Mr. V G Kannan, Mrs. Anshula Kant, Mrs. Arundhati Bhattacharya, Ms. Anjuly Chib Duggal.
Company has V Sankar Aiyar & Co. as its auditors. As on 31-Dec-2015, the company has a total of 7,611,903,782 shares outstanding.
enlaces rápidos
State Bank of India. enlaces rápidos
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Contract / Employee Stock
Contract / Employee Stock
What is the name of your state (only U. S. law)? SRA
I have a 2 part question. Scenario 1: I was with X startup company for about 9 years, during which time the company had some financial troubles and asked employees to take a 10% pay cut. In return we were verbally promised we would get 2x that amount in stock. The company has sense been acquired and I have thus resigned from the new company. Meanwhile I assumed the entire time my money / stock was accounted for. The new company has sense sold a portion of the company for a tremendous gain. I went to collect and they have stated I forfeited my stock when I resigned due to legal verbiage in Question 2 which in my opinion should have nothing to do with Question 2 as they are completely different transactions.
Scenario 2: While I was employed with this new company I was offered X amount of common stock (Nonstatutory stock option).
Vesting Schedule “Subject to the company’s 2011 stock option plan, so long as your employment or consulting relationship with the company continues, the shares underlying this option shall vest and become exercisable in accordance with the following schedule: 10% of the shares subject to the option shall vest and exercisable upon grant. The remaining 90% of the total number of shares subject to the option shall vest and become exercisable on a monthly basis thereafter (2.5% each month) beginning on the first anniversary of the vesting commencement date and ending on the fourth anniversary of the commencement date. If your relationship with the company is terminated for any reason, the option shall terminate with respect to all unvested shares underlying this option.”
Termination Period This option may be exercised for 90 days after termination of your employment or consulting relationship, except as set out in section 5 of the stock option agreement (but in no event later than the expiration DATE). The optionee is responsible for keeping track of the exercise periods following termination for any reason of his or her service relationship with the company. The company will not provide further notice of such periods.
Exercise upon termination Following the date of termination of optionee’s continuous service status for any reason, optionee may exercise the option only as set forth in the notice and this section 5. To the extent that optionee is not entitled to exercise the option as of the termination date, or if optionee does not exercise the option within the termination period set forth in the notice of the termination periods set forth in this section 5, the option shall terminate in its entirety. In no event may any option be exercised after the expiration date of the option as set forth in the notice.
Conclusions: Post my resignation I did consulting work on and off for about 4 months for them building up an invoice that was never paid. My argument is that Scenario 1 is in no way under the agreement for Scenario 2 as I paid for those options years before Scenario 2 existed. My argument for Scenario 2 is that my consulting was never terminated and per the agreement it continued to accrue. ¿Cuáles son tus pensamientos? Do I have valid legal grounds here?
quincy said: Yesterday 03:16 PM
What is the name of your state (only U. S. law)? SRA
I have a 2 part question. Scenario 1: I was with X startup company for about 9 years, during which time the company had some financial troubles and asked employees to take a 10% pay cut. In return we were verbally promised we would get 2x that amount in stock. The company has sense been acquired and I have thus resigned from the new company. Meanwhile I assumed the entire time my money / stock was accounted for. The new company has sense sold a portion of the company for a tremendous gain. I went to collect and they have stated I forfeited my stock when I resigned due to legal verbiage in Question 2 which in my opinion should have nothing to do with Question 2 as they are completely different transactions.
Scenario 2: While I was employed with this new company I was offered X amount of common stock (Nonstatutory stock option).
Vesting Schedule “Subject to the company’s 2011 stock option plan, so long as your employment or consulting relationship with the company continues, the shares underlying this option shall vest and become exercisable in accordance with the following schedule: 10% of the shares subject to the option shall vest and exercisable upon grant. The remaining 90% of the total number of shares subject to the option shall vest and become exercisable on a monthly basis thereafter (2.5% each month) beginning on the first anniversary of the vesting commencement date and ending on the fourth anniversary of the commencement date. If your relationship with the company is terminated for any reason, the option shall terminate with respect to all unvested shares underlying this option.”
Termination Period This option may be exercised for 90 days after termination of your employment or consulting relationship, except as set out in section 5 of the stock option agreement (but in no event later than the expiration DATE). The optionee is responsible for keeping track of the exercise periods following termination for any reason of his or her service relationship with the company. The company will not provide further notice of such periods.
Exercise upon termination Following the date of termination of optionee’s continuous service status for any reason, optionee may exercise the option only as set forth in the notice and this section 5. To the extent that optionee is not entitled to exercise the option as of the termination date, or if optionee does not exercise the option within the termination period set forth in the notice of the termination periods set forth in this section 5, the option shall terminate in its entirety. In no event may any option be exercised after the expiration date of the option as set forth in the notice.
Conclusions: Post my resignation I did consulting work on and off for about 4 months for them building up an invoice that was never paid. My argument is that Scenario 1 is in no way under the agreement for Scenario 2 as I paid for those options years before Scenario 2 existed. My argument for Scenario 2 is that my consulting was never terminated and per the agreement it continued to accrue. ¿Cuáles son tus pensamientos? Do I have valid legal grounds here?
All agreements signed between you and the company would need to be reviewed in their entirety to determine if you have valid legal grounds. For this personal review, you will need to seek out help from an attorney in your area. The analysis of contracts/agreements is considered the practice of law and goes beyond the scope of this forum. Lo siento.
Can I withdraw money from my IRA before age 59Ѕ ?
With the sharp rise in the stock market over the last 20 years, the value of many folk's IRAs haven't just grown, they've exploded beyond all imagination or expectation. A few have felt overwhelmed with the prospect of abundant future cash flow and have asked if it's possible to withdraw smaller sums from their IRA prior to age 59Ѕ. Under current tax law you can withdraw all the money you want from an IRA before age 59Ѕ, but you have to pay regular income tax on the withdrawal plus a 10% penalty tax.
Is there a tax loophole I can use?
Fortunately, there is a loophole known as a "72(t) exception". Under current tax law (Internal Revenue Service Code Section 72(t)(2)(a)(iv)) you can avoid the 10% penalty tax if you take "substantially equal periodic payments." The Internal Revenue Service 1989 Cumulative Bulletin (Notice 89-25 on Page 666) tells you how to calculate what it considers to be "substantially equal periodic payments". IRS Revenue Ruling 2002-62 adds additional details and clarifies some issues pertaining to IRA early withdrawals. All of these engrossing volumes are very likely available at your local law library.
Can you summarize how this loophole works?
To take a series of "substantially equal periodic payments" (SEPP) from your IRA without penalty, you must withdraw money at least once a year, and you must keep taking withdrawals for five years or until you reach age 59Ѕ, whichever is longer. So, a 35-year-old must take withdrawals for twenty-five years, while a 51-year-old must take them for eight-and-a-half years. A 57-year-old would have to take withdrawals for five years, until age 62. Also, you must let a minimum of 5 years plus 1 day elapse from the date of your first SEPP withdrawal before making "unlimited" withdrawals from your IRA, even if you've reached age 59 1/2. Otherwise, the IRS will hit you with the 10% penalty and retroactive interest charges.
The amount of your withdrawal is calculated based on the balance of your retirement account on December 31 of the preceding year or any date in the current year prior to the first distribution using your age on December 31st of the year in which you make the withdrawal.
What if I have money in a 401(k) account instead of an IRA?
You can rollover your 401k account into an IRA after you terminate your employment. However, there are two reasons this might not be advisable:
You have "highly appreciated" company stock in your 401(k). If you take a lump sum distribution of all your qualified plans, you will pay ordinary income tax (plus the 10% penalty if you are under age 55) on the cost basis of your employer's stock held in your 401(k). Any appreciation is then taxed at the capital gains rate when you sell the shares. If you rollover the company stock to an IRA, this option is lost and you pay ordinary income taxes on all distributions from the IRA.
The clearest discussion I've seen to date on the issues surrounding company stock in a 401k comes from Dave Braze (aka TMFPixy) at the Motley Fool, click here. It's well worth reading.
You can make penalty-free withdrawals from a 401(k) at age 55. You must wait until age 59 1/2 to make penalty-free withdrawals from an IRA. While this seems like a big break for a 55-year-old retiree, there are several things to consider; (1) Your employer must make it convenient for an ex-employee to make retirement withdrawals, many employers can't be bothered, (2) Rolling over your 401(k) funds to an IRA may increase the variety of investments available to you and lower your fees. If that's the case, the hassle of SEPP withdrawals from an IRA may be worth it.
Note: There is one fine point that many people miss in taking penalty-free withdrawals from a 401k at age 55. To do so, you must terminate your employment no earlier that the year in which you turn age 55. (See IRS Notice 87-13) If you retired at age 54 and waited until age 55 to make withdrawals from your 401k, you would not be able to make unlimited penalty-free withdrawals. You could only make penalty-free withdrawals by using SEPP.
What if I have stock options or another non-qualified plan?
Today, many folks have a sizable number of stock options in addition to their 401(k) and IRA retirement accounts. While discussion of this topic is beyond the scope of this article, there is an excellent volume on the subject written by tax attorney Kaye Thomas. This book offers plain language guidance on all the popular forms of equity compensation: stock grants, nonqualified options, incentive stock options and employee stock purchase plans. It also covers the pitfalls of the alternative minimum tax (AMT) as it relates to option plans.
Consider Your Options: Get the Most From Your Equity Compensation.
by Kaye A. Thomas
248 pages (January 10, 2000) Fairmark Press, Inc.;
Click here to order Consider Your Options Today!
The amount of the penalty-free withdrawals that you can take from your IRA varies considerably, depending on which of the three IRS-approved methods you use to calculate the withdrawals. The three methods are 1) the life expectancy method (also known as the "minimum method"), 2) the amortization method . and 3) the annuity factor method. Table One summarizes the advantages and disadvantages of each.
Table One. Three Methods for IRA Early Withdrawals .
The life expectancy method is outlined on Page 28 of IRS Publication 590. "Individual Retirement Arrangements." The withdrawal in 2003 would be calculated by dividing the balance of any or all of your IRAs on December 31, 2002, by your life expectancy (or the joint life expectancy of you and the beneficiary of your IRA). The single life expectancy of a 40-year-old, (which can be found on Page 65 of IRS Publication 590),is 43.6 years. So, under this method, a 40-year-old with a $100,000 IRA could take $2,294 ($100,000 / 43.6) from the IRA without paying the 10% excise tax on premature withdrawals. Next year, the investor would divide the IRA balance as of December 31, 2003, by 42.7 (the life expectancy of a 41-year-old). The investor would have to continue these annual withdrawals until age 59Ѕ.
Under the Life Expectancy method, as the balance of your retirement account goes up or down, so goes the amount you are required to withdraw each year. This is actually an advantage for younger IRA holders, since they are not locked into the first year's withdrawal amount as their IRA balance grows over the next 20 or 30 years. If your IRA balance doubles, the required withdrawal will be slightly more than double the previous year's withdrawal. Similarly, if a stock market drop results in the value of your IRA dropping by 50%, this year's withdrawal will be slightly more than half the preceding year's withdrawal amount.
The amortization method allows you to amortize the balance of your IRAs over your life expectancy (or the joint life expectancy of you and your beneficiary), using a "reasonable" interest rate assumption for earnings on your account. The formula for making this calculation is as follows:
The IRS has ruled that a reasonable interest rate is anything less than 120% of the "Mid-Term Applicable Federal Rate" for either of the two months immediately preceding the month in which the distribution begins. The IRS publishes these rates monthly. For December 2002, the Annual Mid-Term Rate was 3.31%. By assuming that the account would earn 120% of that rate, or 3.98%, a 40-year-old with a $100,000 IRA balance could boost the penalty-free withdrawals to $4,868 per year.
Unlike the "life expectancy" method where you recalculate the annual withdrawal based on your IRA balance on December 31 of the previous year, under the amortization method, the withdrawal amount is fixed in the first year. You don't get to increase the annual withdrawal for inflation or an increase in the asset value of your IRA.
Which Interest Rate Should I Use?
Revenue Ruling 2002-62 is very clear on this issue. A taxpayer may not use an interest rate that exceeds 120% of the mid-term applicable Federal rate. However, you may use a lower interest rate if you like.
Revenue Ruling 2002-62 also states that you must use the interest rate for either of the two months immediately preceding the month in which the distribution begins. For example, if you make your first distribution in July 2007, you may use either the May 2007 or June 2007 interest rate.
120% Mid-Term Annual Applicable Federal Rates (%):
Readers prefering to get their interest rates directly from the horse's mouth should go to the IRS web site, under Applicable Federal Rates. The JavaScript calculator below is designed to use the mid-term annual rates listed in Table 1 of the IRS monthly interest rate update.
The IRS is frequently late is posting the latest interest rates. Here's another source for the latest numbers from a Pennsylvania law firm, see link: http://evans-legal. com/dan/afr. html .
For the convenience of our readers, Retire Early has developed a JavaScript calculator for determining IRA withdrawals using the Life Expectancy and Amortization methods. To use the calculator you need three things; 1) your IRA balance on December 31 of last year, 2) your life expectancy (Click here for the single life expectancy table, the joint life table appears in IRS Publication 590. Click here to download Publication 590 from the IRS Web site.). and 3) the Mid-Term Applicable Federal Rate which appears in a table just above.
For the annuity factor method, this calculation involves dividing the IRA balance by an "annuity factor" -- the present value of a payment of $1 per year for your life expectancy, based on "reasonable" mortality tables and a "reasonable" interest rate at the time the payments begin. You can use up to 120% of the "Mid-Term Applicable Federal Rate" as a reasonable rate but you must use the mortality table in Appendix B of IRS Revenue Ruling 2002-62.
To assist readers in making the calculation, Retire Early has developed an Excel spreadsheet based on the mortality table in Revenue Ruling 2002-62, Appendix B. It also includes the distribution calculation for the amortization and minimum methods for easy comparison. ( Note: For SEPPs beginning on Jan 1, 2003 and after, the Annuity 2003 mortality table must be used.)
Download Annuity 2003 Calculator (annu2003.xls size = 40,448 bytes)
Like the amortization method, under the annuity factor method you don't get to recalculate the amount of your withdrawal each year. The amount is fixed for five years or until you reach 59Ѕ, whichever is longer.
What if I started my SEPP before January 1, 2003?
If you started your SEPP in 2002 or earlier using the UP-1984 Mortality Table, you may continue to use it. Many retirees will prefer to do so since it yields a higher withdrawal than the mortality table in Rev. Ruling 2002-62 Appendix B. You can download a copy below:
Download the Retire Early Annuity Factor Calculator (UP-1984 Mortality Table) (annu984.xls size = 34,816 bytes)
Important Note: For SEPPs beginning on January 1, 2003 or after, you must use the new 2003 IRS mortality table for the annuity factor method.
In the past, using the UP-1984 Mortality Table, the annuity factor method resulted in withdrawals higher than the amortization method. With the new 2003 IRS Mortality Table that is no longer the case. For all ages and interest rates, the amortization method results in a larger annual distribution.
Comparison of Minimum, Amortization, and Annuity Factor Methods $100,000 IRA balance, IRS 2003 Mortality Table
After reading the table above you might ask, "Why would I want to use the annuity factor method?" The answer is you probably wouldn't. Since the amortization method yields a larger annual distribution for the same interest rate, you'd want to use that method instead of the annuity factor method.
What if my IRA runs out of money while taking SEPP distributions.
If you have been following an approved SEPP program and losing investments deplete your IRA before age 59-1/2, the IRS will not assess the 10% penalty and retroactive interest changes that usually result upon a modification to the annual distribution. (See Rev. Ruling 2002-62.)
Additionally, if you have been using the amortization or annuity method, you may make a one time change to the Minimum Distribution method. For a given IRA balance, this will reduce the annual distribution and allow the remaining portfolio to last longer. (See Rev. Ruling 2002-62.)
This is good news for those who attempted to take a SEPP using the annuity method with a high interest rate or from a concentrated portfolio and have suffered severe losses. If you invested primarily in something like Enron or WorldCom, your portfolio could be close to zero by now. The opportunity to make a penalty-free change to the minimum distribution method will offer some belated relief -- at least from the IRS penalties.
On the other hand, if you invested in Dell or Microsoft ten years ago and your portfolio has grown appreciably, you could also benefit from a change to the minimum distribution method. For example, let's say a 40-year-old started a SEPP eight years ago in November 1994 when 120% of the Long-Term Federal applicable rate was 9.61%. Using the UP-1984 Mortality Table and the annuity method, the fixed annual withdrawal in 1994 would be $9,456 from a $100,000 IRA. If the portfolio had grown to $1 million today, our now 48-year old retiree could switch to the minimum distribution method and take $27,780 from a $1 million IRA in 2002. That's almost a three-fold increase in the annual IRA distribution without incurring a penalty.
The option to switch to the minimum method may also appeal to those that decide to return to work or receive another source of taxable income that makes it unnecessary to continue their IRA withdrawals. Completely stopping the SEPP withdrawals would result is the application of the 10% penalty to all distributions to date, plus interest. Switching to the minimum method would at least reduce the distribution without triggering the penalty. However, the disadvantage is that you won't be able to change back to the amortization or annuity method at a later date without triggering the 10% penalty.
How do I calculate the amount of the penalty and interest if I decide to stop my SEPP distributions?
You pay the 10% on all distributions to date, plus interest from the date of the distribution to the date you decide to discontinue your SEPP program. Retire Early has developed a simple, easy to use Excel spreadsheet that allows you to estimate the amount of the penalty. It downloads directly as an Excel file, you don't need to "unzip" it.
Download the "Busted" SEPP Calculator (seppbust. xls size = 25,600 bytes)
The same penalty applies if you make a mistake in calculating the annual distribution or run afoul of IRS regulations in some other way. Double check your work.
Can I still use annual recalculation or annual inflation adjustments with the amortization and annuity methods?
In the past, there have been several IRS private letter rulings (PLRs) allowing for annual recalculation with the annuity and amorization methods as well as several allowing the annual SEPP distribution to be increased for inflation or "cost of living" (see PLRs 9503631, 9726035 and 9816028.) Revenue Ruling 2002-62 is silent on these method variations.
In 2004 there were two IRS private letter rulings allowing for recalculation using the amortization method ( PLR 2004-32021 and PLR 2004-32024 ) and one allowing for recalculation with the annuity factor method (PLR 2004-32023 .) To date, there have been no authoritative published references giving guidance on whether inflation adjustments with the annuity or amortization methods are permissible under the new rules.
The Retire Early Home Page has developed an Excel Spreadsheet you can use to keep track of your annual SEPP distributions using the Amortization Method with Recalculation. Hacer clic. aquí.
If you want to use inflation adjustments for a SEPP starting on or after Jan. 1, 2003, it's probably best to request an IRS private letter ruling on the issue, or wait until another taxpayer spends a few thousand dollars asking the question and the IRS publishes a positive ruling. Then you'll have the answer for free.
How do I notify the Internal Revenue Service of my intention to take SEPP distributions?
Your IRA Custodian will have a form for you to fill out to request an IRA distribution. Make sure you check the box with "Exception Code 2 - Early Distribution Penalty Does Not Apply" or similiar wording if it appears on the form.
At tax time, your IRA Custodian files Form 1099-R with the IRS notifying them that you made an IRA distribution. Your IRA Custodian will also forward you a copy of the Form 1099-R that they sent to the IRS.
The amount of your IRA withdrawal is reported on Line 15a of Form 1040. If you made any non-deductible contributions to your IRA, you can file Form 8606 to determine what portion of Line 15a is not taxable. This lower taxable amount is then reported on Line 15b of Form 1040. If you don't have any non-deductible contributions, then Line 15a and 15b should have the same number.
Starting in 2004, you must also complete IRS Form 5329 to claim the exception to the 10% penalty
You'll also want to save a copy of all your SEPP withdrawal calculations in case you are audited.
Do I have to start my SEPP distributions on January 1st?
No. You may pro-rate the first year's distribution for the remaining months in the year (e. g. starting a SEPP in July would be 6/12ths of the full-year amount.) The IRS calls this a "stub year". In the second and all subsequent years, the full amount of the annual distribution must be withdrawn. (See PLR 200105066) You may also elect to take the full-year amount in the first year if you like -- even if you start the SEPP in December.
The IRS doesn't care how you actually withdraw the money from the account (e. g. 1 annual payment, 12 monthly payments, 52 weekly payments, or any variation thereof.) The only requirement is that the total of all the withdrawals during the year must exactly equal the calculated amount of the annual (or stub year) distribution.
Can I have more than one IRA?
Sí. You may have as many IRA accounts as you like and take SEPP distributions from one, two, or all of them. The only restriction is that you may not add money to an IRA currently undergoing SEPP distributions, or make additional withdrawals beyond the SEPP distribution. Any modifications would trigger the 10% penalty on all SEPP distributions made to date plus back interest charges.
Can I make an additional penalty-free IRA withdrawal such as the one for a first-time home purchase or higher education expenses from an IRA currently undergoing SEPP distributions?
It's unclear. There haven't been any IRS private letter rulings on the issue to date. Because of the large penalty and interest charges that would result if the IRS objected, I'd seek a positive IRS private letter ruling on the subject before proceding.
If I get a part-time job, may I make an annual IRA contribution even though I'm currently taking SEPP distributions from my IRA?
Sí. To the extent that you have wage & salary income (i. e. "earned" income), you may make on IRA contribution up to the annual maximum. However, you may not put the annual IRA contribution in an IRA currently undergoing SEPP distributions . The IRS considers this to be a modification and will assess the 10% penalty plus interest on all distributions to date. You must make the annual IRA contribution to a new IRA, or an existing one that is not undergoing SEPP withdrawals
Do you need to hire a CPA to make the calculation for you?
It depends. The majority of the early retirees I know are able to read and understand the explanation above and are comfortable enough with Excel spreadsheets and arithmetic to make the calculation themselves. But if you currently have a tax preparer doing your return or are afraid of numbers, you may as well pay a few hundred dollars more for him or her to do the SEPP calculation as well.
If you decide to use a tax advisor, it's important to get some kind of guaranty on his work. Here's some sage advice from best-selling financial author Suze Orman:
IRA Early Withdrawals "Have the firm that will be calculating your SEPP state on the company letterhead (not the financial advisor's letterhead) that the company is responsible for calculating your substantially equal periodic payments and will be responsible for any mistakes and any penalty incurred." (Suze Orman, You've Earned It, Don't Lose It -- Mistakes You Can't Afford to Make When You Retire . p. 109.)
Need to know the attributes of common stocks including the rights of shareholders, how to use the Constant Growth Model, how to value non-constant growth stocks, the basics of market equilibrium and market efficiency, and the attributes and valuation of preferred stock. On the final exam, this chapter typically has 3-5 questions; A CAPM problem, a constant growth stock valuation problem, a non-constant growth valuation problem, and 1-2 concept questions.
1. Which of the following is likely to decrease the current price of a stock? a. Increasing the discount rate. segundo. Increasing the dividend. do. Increasing the number of years you plan to own the stock. re. Increasing the growth rate. mi. None of the above are likely to decrease the current price of a stock.
2. The constant dividend growth model may be used to find the price of a stock in all of the following situations except:
a. when the expected dividend growth rate is less than the discount rate. segundo. when the expected dividend growth rate is negative. do. when the expected dividend growth rate is zero. re. when the expected dividend growth rate is greater than the discount rate. mi. both b. and c. are correct.
3. Suppose a stock is not currently paying any dividends, and its management has announced that it will not pay a dividend for at least five years, but that it does expect to start paying dividends sometime in the future. Under these conditions, which of the following statements is most correct? a. Since it is expected to someday pay dividends, the value of the stock today can be found with this equation: P0 = D1/(k - g). segundo. The value of the stock cannot be found, even theoretically, by finding the present value of the future expected dividends. do. The value of the stock is zero. re. The value of the stock is determined solely by bids from people who want to control the company in order to draw salaries. mi. The value of the stock could be found by discounted cash flow procedures, but we would have to insert zeros for Dt until such time as we expect the company to begin paying dividends.
4. Companies can issue different classes of common stock. Which of the following statements concerning stock classes is most correct? a. All common stocks fall into one of three classes: A, B, and C. b. Most firms have several classes of common stock outstanding. do. All common stock, regardless of class, must have voting rights. re. All common stock, regardless of class, must have the same dividend privileges. mi. None of the above statements is necessarily true.
5. Assuming g will remain constant, the dividend yield is a good measure of the required return on a common stock under which of the following circumstances?
a. g > 0. b. g = 0. c. g < 0. d. Under no circumstances. mi. Answers a and b are both correct.
6. The preemptive right is important to shareholders because it a. allows management to sell additional shares below the current market price. segundo. protects the current shareholders' against dilution of ownership interests. do. is included in every corporate charter. re. will result in higher dividends per share. mi. The preemptive right is important to bondholders but not to shareholders.
1. ZAL Company's earnings and dividends are expected to remain unchanged for the next two years. After 2 years, dividends are expected to grow at a 10 percent annual rate forever. The last dividend paid was $3.00, and the required rate of return is 15 percent. What should be the current market value of ZAL stock? a. $49.04 b. $54.78 c. $57.09 d. $60.14 e. None of the above is within $.50 of the correct answer.
2. What is the current price of a firm's 12 percent, $100 par value preferred stock with a required rate of return of 8%? a. $120 b. $130 c. $140 d. $150 e. $160
3. A firm's common stock is trading at $50 per share. In the past the firm has paid a constant dividend of $5 per share. However, the company has just announced new investments that the market did not know about. The market expects that with these new investments, the dividends should grow at 4% per year forever. Assuming that the discount rate remains the same, what will be the price of the stock after the announcement? a. $86.67 b. $50.00 c. $52.00 d. $44.65 e. $83.33
4. Pern Corp. just paid an annual dividend of $2.00. Dividends are expected to grow at a constant rate forever. The price of the stock is currently $28.40. The required rate of return for this stock is 14 percent. What is the expected growth rate of Pern's dividend?
5. Niven Rings Inc. just paid a regular dividend of $1.50 per share. The regular dividend is expected to grow at a rate of 10 percent per year for the next three years, at a rate of 7 percent per year for the next two years, and after that at a rate of 4 percent per year forever. In addition to the regular dividend, Niven Rings is expected to pay a special dividend of $5.00 at the end of year 2. (NOTE: A special dividend is a one time only payment that will not recur. It is not considered in calculating the amount of future dividends). The appropriate discount rate is 14 percent per year. What is the price of the stock?
6. IBS Corporation has had dividends grow from $2.00 per share to $5.00 per share over the last 5 years (the $5.00 per share dividend was paid yesterday). This compounded annual growth rate in dividends is expected to continue well into the foreseeable future. If the current market price of IBS's stock is $38.00 per share, what rate of return do investors expect to receive from buying IBS stock? a. 13.16% b. 15.80% c. 33.27% d. 35.91% e. None of the above are within 50 basis points (a basis point is 1/100th of a percent) of the correct answer.
7. Tosev Inc. just paid a dividend of $2.00 per share. This dividend is expected to grow at a supernormal rate of 15 percent per year for the next two years. It is then expected to grow at a rate of 5 percent per year forever. The appropriate discount rate for Tosev's stock is 16 percent. What is the price of the stock? a. $16.86 b. $20.13 c. $20.76 d. $22.72 e. $30.21
8. Doors and Frames Co. is expected to pay a dividend of $2.20 per share next year. The dividends are expected to grow at a rate of 9 percent forever. A share in Doors and Frames Co. currently trades at $45.60. Assuming the stock is in equilibrium, what is the investors' required rate of return? a. 15 percent b. 14.2 percent c. 13.8 percent d. 13 percent e. 11 percent
Questions: 1.A (a variation on rate up implies price down), 2. D, 3. E, 4. Both C and E were accepted, in the United States all common stock should have some type of control/voting rights, in foreign countries, voting rights are not required, 5. E (constant growth model given nonsense answer when growth rate (g) > required return on stock (rs). 6. B,
1 B, A non costant growth problem, solve in three steps, 1) calculate the dividends during the non-constant growth period plus one constant growth dividend, D1-3, d2=3, d3=3.30, 2) Sell the stock as soon as growth becomes contant, P2=D3/(rs-g)=3.30/(.15-.10)=66, 3) Take the NPV @15 of the dividends and expected selling price, Cf0=0, C01=3, C02=3+66=69.
2. D, preferred stock is solved using the constant growth formula, P0=(D0*(1+g))/(rs-g), and since g=0, this simplifies to P0=D0/rs.
3. A, solve in two steps using the constant growth formula, 1) since stock is initially 0-growth, then rs = D0/P0 = 5/50, 2) use the rs from step 1 to solve, new P0 = (5* (1+4%))/(rs-4%).
4. A, solve for g, where 14%= ((2*(1+g))/28.40) + g
5. D, Step 1, calculate the dividends for the non-contant growth period plus 1 dividend, a total of 4 dividends. Step 2, sell the stock as soon as growth become constant, P3 = D4/(10%-4%), Step 3, Take the NPV at 10% of the expected dividends and expected selling price. CF0=0, C01=D1, C02=D2 + 5.00, C03=D3 + P3.
6. D, key step is to find the growth rate, using PV=-2, N=5, FV=5, PMT=0, and compute I/Y=growth rate. Use the constant growth formula and g from step 1 solve for rs where rs = ((5* (1+g))/38) + g.
7. D. three steps, Calculate the dividends for the supernormal growth period plus one dividend, D1=2.30, D2=2.65, D3=2.78, Step 2, sell the stock as soon as growth becomes constant, P2=D3/(rs-g)=2.78/(.16-.05)=25.24. Step 3, take the NPV of the dividends and expected selling price at 16%, where CF0=0, C01=2.30, C02=2.64+25.24=27.88.
8. C, D1/P0+g = 2.20/45.60 + 9%=13.82%.
Question
Show transcribed image text On January 1, 2012, Barwood Corporation granted 5,020 options to executives. Each option entitles the holder to purchase one share of Barwood's $5 par value common stock at $50 per share at any time during the next 5 years. The market price of the stock is $66 per share on the date of grant. The fair value of the options at the grant date is $165,600. The period of benefit is 2 years. Prepare Barwood's journal entries for January 1, 2012, and December 31, 2012 and 2013. (If no entry is required, enter No Entry as the description and 0 as the amount.)
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The New York Times
How to Get Better Interest Rates for Saving Money
By TARA SIEGEL BERNARD
If you’re a saver, you’re probably frustrated, even angry. There’s nothing worse than being punished for good behavior, and that’s exactly how it feels if you’re trying to amass a pile of cash before making a big purchase, particularly when banks pay interest rates that don’t come close to keeping pace with inflation.
That frustration is precisely what prompted Mark Sweeting, a high school history teacher in Portland, Ore. to pull his emergency savings fund out of an online savings account at ING Direct. It had lured him two years ago with an annual rate of 1.25 percent that has since dwindled by more than a third.
“It just seemed so obnoxious,” he said, adding that he recently moved his money to Barclays. which is paying 1 percent. “The more money I had in my emergency account, the less and less it made.”
He said that he was well aware that his new rate might eventually sink, too, but that he would continue playing the rate-chasing game.
Other consumers are tempted, or at least curious, about potentially riskier options beyond the world of federally insured savings — perhaps short-term bonds or dividend-paying stock funds. But what sort of trade-off does that entail? And are there any safer alternatives?
I asked several advisers how comfortable they were with the risk of options that might pay a little more.
Some were slightly more cautious, but most offered similar advice: if you’re more concerned about the return “of” your capital, then you probably shouldn’t get too ambitious with the return “on” your capital, as advisers like to say, particularly if you expect to tap the savings in five years or less.
“Consumers also need to be aware of their natural behavioral instinct to believe that someone out there can find the silver bullet for them that will give them the return they want at minimal risk,” said Barry Korb, a financial planner and president of Lighthouse Financial Planning in Potomac, Md.
You don’t have to dig too far back to find examples of people burned by investments that promised higher yields in exchange for only a tad more risk. Remember auction-rate securities? Sold by brokers, these investments froze during the financial crisis, locking investors out, even though the securities were billed as safe and liquid as cash.
And then there was Charles Schwab’s YieldPlus Fund, which was marketed as a cash alternative but whose value plunged by more than 42 percent during the financial crisis.
Given that rates are at record lows and are expected to stay that way for the next few years, finding options that beat the national averages will take a bit of work.
Currently, the national average on an interest-bearing, federally insured savings account is a meager 0.13 percent, according to Market Rates Insight. a financial data research firm, down from 0.79 percent in July 2007.
And the national average rate on certificates of deposit — with maturities from three months to five years — is 0.70 percent, down from 4.56 percent in July 2007.
“Based on a statistical analysis that I did going back even further, almost 50 years, interest rates on deposits have never been this low,” said Dan Geller, executive vice president at the firm.
Citibank customers were recently sent an ad promoting a specific type of savings account. Rates are at record lows.
Considering that the inflation rate is running at about 1.7 percent a year (and many consumers are experiencing even higher costs), many savers are losing purchasing power. So here are a few options to consider.
LESS THAN A YEAR OR TWO For people who need to tap their funds within a year — whether for an emergency or a short-term goal like a down payment on a home or a car — experts advise keeping your money as liquid and safe as possible.
So you might start searching for a higher-yielding online savings account on Web sites like MoneyRates. com. Bankrate. com or MoneyAisle. com. where bank and credit unions “bid” on how much they’re willing to pay you in interest (though a recent search in my Brooklyn ZIP code yielded an unimpressive 0.50 percent).
When evaluating these accounts, pay close attention to any investment minimums, fees or other restrictions. For now, TIAA Direct appears to be offering one of the highest-yielding savings rates at 1.24 percent.
The Web site Nerd Wallet has come out with a monthly interest-rate monitor. which lists deposit accounts that beat one measure of inflation, as my colleague Ann Carrns recently pointed out on our Bucks blog. Many of the accounts were offered by credit unions, which usually have eligibility restrictions, but it’s worth perusing.
Certificates of deposit obviously aren’t as liquid as savings accounts, but you can seek out higher-yielding C. D.’s with terms that will mature when you need the money. Or, you can consider playing a little game with Ally Bank’s five-year C. D.. which pays 1.73 percent; it charges a penalty that amounts to 60 days’ worth of interest if you withdraw your money before the C. D. matures. This lets you take advantage of a relatively attractive rate with a minimal penalty should rates spike and you want to reinvest your money elsewhere, Mr. Korb said. He figures that plunking your money into Ally’s five-year certificate of deposit, as long as you can keep your money there for about six months, would be a better choice than its one-year C. D. which pays 1.01 percent.
Savings accounts, C. D.’s and money market deposit accounts are generally insured by the Federal Deposit Insurance Corporation up to $250,000 per depositor per bank. Federally insured credit unions generally follow the same rules as banks. (And money market deposit accounts shouldn’t be confused with money market mutual funds. which are not insured ; the seven-day average rate on taxable money funds was a mere 0.03 percent as of July 3, not far from its record low, according to iMoneyNet .)
TWO TO OVER THREE YEARS Several financial planners recommend sticking with the ultrasafe options described above even if you have a little more time. But short-term bond funds may be appropriate for some savers, as long as they fully understand and can handle the risks.
So what are the risks. Rising interest rates, for one. When rates rise, bond prices will fall. This is especially important for bond fund investors; if you hold an individual bond until maturity, you will generally receive your initial investment back. But assembling this type of portfolio typically isn’t cost-effective for smaller investors.
Bond funds with shorter maturities are less susceptible to interest rate risk. That’s why it is important to pay attention to a fund’s duration, which measures its sensitivity to rate changes. Generally speaking, for every percentage point that rates rise, a bond’s value will decline by its duration (stated in years). So if rates climb by one percentage point, the value of a bond fund with an average duration of two years will drop by 2 percent.
“If you absolutely need X amount on a certain date, such as for a college tuition bill that must be paid by Aug. 25, that’s one thing,” said Russell Wild, an investment adviser and bond expert. But if you have some “fudge room” for hitting a short-term goal, like buying a car, he said you may consider splitting your money between a savings account and a short-term bond fund that invests in high-quality, or investment-grade, bonds, like the Vanguard Short-Term Investment-Grade Fund. The fund currently pays 1.59 percent (after expenses) for those with at least $3,000 to invest, and pays an even higher 1.70 percent for people who put in more than $50,000. (A more diversified but lower-yielding alternative is the Vanguard Short-Term Bond Index fund.)
The danger, of course, is that you can lose money. Beyond interest rates, there are other potential pitfalls, including the risk of default. Mr. Wild points out that, during the height of the financial crisis in 2008, the investment-grade bond fund lost 4.65 percent. “It’s a gamble you’re taking, for sure,” he said. “But the odds are heavily in your favor.”
Other low-cost options recommended by planners included the Vanguard Short-Term Treasury Fund. which invests only in government-backed Treasury securities and has an average duration of 2.2 years (but it currently yields a meager 0.23 percent). People in higher tax brackets may consider the Vanguard Short-Term Tax-Exempt Fund, which invests in municipal securities — meaning investments that are generally exempt from federal income taxes, unless you’re subject to the alternative minimum tax — with an average duration of 1.2 years and currently yielding 0.42 percent.
“If one is considering investing in an ultrashort bond fund, keep in mind that they can vary significantly in their risks and rewards,” said George Kiraly Jr.. president of the LodeStar Advisory Group in Short Hills, N. J. Review the credit quality and maturity dates of the fund’s investments, as well as its duration and overall costs, he added. Also look at how well it performed during the crisis of 2008. And he said all bets were off if the financial crisis in Europe intensifies, which could increase the risk of default, potentially for corporate as well as government bonds.
“Always be skeptical of any investment that promises you a greater potential for return at no additional risk,” he cautioned.
Several advisers said the extra returns that some funds might provide were simply not worth the risk. “In the current environment, people need to save their way to meet short-term financial goals,” said Jerry Verseput. a financial adviser in Folsom, Calif. “and not try to invest their way to short-term goals.”
How to Invest Small Amounts of Money Wisely
Contrary to popular belief, the stock market is not just for rich people. Investing is one of the best ways for anyone to create wealth and become financially independent. A strategy of investing small amounts continuously can eventually result in what is referred to as the snowball effect, in which small amounts gain in size and momentum and ultimately lead to exponential growth. To accomplish this feat, you must implement a proper strategy and stay patient, disciplined, and diligent. These instructions will help you get started in making small but smart investments.
Edit Steps
Edit Part One of Three: Getting Ready to Invest
Ensure investing is right for you. Investing in the stock market involves risk, and this includes the risk of permanently losing money. Before investing, always ensure you have your basic financial needs taken care of in the event of a job loss or catastrophic event.
Make sure you have 3 to 6 months of your income readily available in a savings account. This ensures that if you quickly need money, you will not need to rely on selling your stocks. Even relatively "safe" stocks can fluctuate dramatically over time, and there is always a probability your stock could be below what you bought it for when you need cash.
Ensure your insurance needs are met. Before allocating a portion of your monthly income to investing, make sure you own proper insurance on your assets, as well as on your health.
Remember to never depend on investment money to cover any catastrophic event, as investments do fluctuate over time. For example, if your savings were invested in the stock market in 2008, and you also needed to spend 6 months off work due to an illness, you would have been forced to sell your stocks at a potential 50% loss due to the market crash at the time. By having proper savings and insurance, your basic needs are always covered regardless of stock market volatility.
Choose the appropriate type of account. Depending on your investment needs, there are several different types of accounts you may want to consider opening. Each of these accounts represents a vehicle in which to hold your investments.
A taxable account refers to an account in which all investment income earned within the account is taxed in the year it was received. Therefore, if you received any interest or dividend payments, or if you sell the stock for a profit, you will need to pay the appropriate taxes. As well, money is available without penalty in these accounts, as opposed to investments in tax deferred accounts. [1] [2]
A traditional Individual Retirement Account (IRA) allows for tax-deductible contributions but limits how much you can contribute. An IRA doesn't allow you to withdraw funds until you reach retirement age (unless you're willing to pay a penalty). You would be required to start withdrawing funds by age 70. Those withdrawals will be taxed. The benefit to the IRA is that all investments in the account can grow and compound tax free. If, for example, you have $1000 invested in a stock, and receive a 5% ($50 per year) in dividends, that $50 can be reinvested in full, rather than less due to taxes. This means the next year, you will earn 5% on $1050. The trade-off is less access to money due to the penalty for early withdrawal. [3]
Roth Individual Retirement Accounts do not allow for tax-deductible contributions but do allow for tax-free withdrawals in retirement. Roth IRAs do not require you to make withdrawals by a certain age, making them a good way to transfer wealth to heirs. [4]
Any of these can be effective vehicles for investing. Spend some time learning more about your options before making a decision.
Implement dollar cost averaging. While this may sound complex, dollar cost averaging simply refers to the fact that -- by investing the same amount each month -- your average purchase price will reflect the average share price over time. Dollar cost averaging reduces risk due to the fact that by investing small sums on regular intervals, you reduce your odds of accidentally investing before a large downturn. It is a main reason why you should set up a regular schedule of monthly investing. In addition, it can also work to reduce costs, since when shares drop, your same monthly investment will purchase more of the lower cost shares.
When you invest money in a stock, you purchase shares for a particular price. If you can spend $500 per month, and the stock you like costs $5 per share, you can afford 100 shares.
By putting a fixed amount of money into a stock each month ($500 for example), you can lower the price you pay for your shares, and thereby make more money when the stock goes up, due to a lower cost.
This occurs because when the price of the shares drops, your monthly $500 will be able to purchase more shares, and when the price rises, your monthly $500 will purchase less. The end result is your average purchase price will lower over time.
It is important to note that the opposite is also true -- if shares are constantly rising, your regular contribution will buy fewer and fewer shares, raising your average purchase price over time. However, your shares will also be raising in price so you will still profit. The key is to have a disciplined approach of investing at regular intervals, regardless of price, and avoid "timing the market".
At the same time, your frequent, smaller contributions ensure that no relatively large sum is invested before a market downturn, thereby reducing risk.
Explore compounding. Compounding is an essential concept in investing, and refers to a stock (or any asset) generating earnings based on its reinvested earnings.
This is best explained through an example. Assume you invest $1000 in a stock in one year, and that stock pays a dividend of 5% each year. At the end of year one, you will have $1050. In year two, the stock will pay the same 5%, but now the 5% will be based on the $1050 you have. As a result, you will receive $52.50 in dividends, as opposed to $50 in the first year.
Over time, this can produce huge growth. If you simply let that $1000 sit in account earning a 5% dividend, over 40 years, it would be worth over $7000 in 40 years. If you contribute an additional $1000 each year, it would be worth $133,000 in 40 years. If you started contributing $500 per month in year two, it would be worth nearly $800,000 after 40 years.
Keep in mind since this is an example, we assumed the value of the stock and the dividend stayed constant. In reality, it would likely increase or decrease which could result in substantially more or less money after 40 years.
Avoid concentration in a few stocks. The concept of not having all your eggs in one basket is key in investing. To start, your focus should be on getting broad diversification, or having your money spread out over many different stocks. [5]
Just buying a single stock exposes you to to the risk of that stock losing significant value. If you buy many stocks over many different industries, this risk can be reduced.
For example, if the price of oil falls and your oil stock drops by 20%, it is possible that your retail stock will increase in value due to customers having more spending money as a result of lower gas prices. Your information technology stock may stay flat. The end result is your portfolio sees less downside
One good way to gain diversification is to invest in an product that provides this diversification for you. This can include mutual funds, or ETF's. Due to their instant diversification, these provide a good option for beginner investors. [6] [7]
Explore investment options. There are many different types of investment options. However, since this article focuses on the stock market, there are three primary ways to gain stock market exposure.
Consider an ETF index fund. An exchange-traded index fund is a passive portfolio of stocks and/or bonds that aim to accomplish a set of objectives. Often, this objective is to track some broader index (like the S&P 500 or the NASDAQ). If you buy an ETF that tracks the S&P 500 for example, you are literally purchasing stock in 500 companies, which provides enormous diversification. One of the benefits of ETFs are their low fees. Management of these funds is minimal, so the client doesn't pay much for their service. [8]
Consider an actively managed mutual fund. A actively managed mutual fund is a pool of money from a group of investors that is used to purchase a group of stocks or bonds, according to some strategy or objective. One of the benefits of mutual funds is professional management. These funds are overseen by professional investors who invest your money in a diversified way and will respond to changes in the market (as noted above). This is the key difference between mutual funds and ETF's -- mutual funds have managers actively picking stocks according to a strategy, whereas ETF's simply track an index. One of the downsides is that they tend to be more expensive than owning an ETF, because you pay an extra cost for the more active management service. [9] [10]
Consider investing in individual stocks. If you have the time, knowledge, and interest to research stocks, they can provide significant return. Be advised that unlike mutual funds or ETF's which are highly diversified, your individual portfolio will likely be less diversified and therefore higher risk. To reduce this risk, refrain from investing more than 20% of your portfolio in one stock. This provides some of the diversification benefit that mutual funds or ETF's provide.
Find a broker or mutual fund company that meets your needs. Utilize a brokerage or mutual fund firm that will make investments on your behalf. You will want to focus on both cost and value of the services the broker will provide you. [11]
For example, there are types of accounts that allow you to deposit money and make purchases with very low commissions. This may be perfect for someone who already knows how they want to invest their money. [12]
If you need professional advice regarding investments, you may need to settle for a place with higher commissions in return for a higher level of customer service. [13]
Given the large number of discount brokerage firms available, you should be able to find a place that charges low commissions while meeting your customer-service needs.
Each brokerage house has different pricing plans. Pay close attention to the details regarding the products you plan to use most often.
Abrir una cuenta. You fill out a form containing personal information that will be used in placing your orders and paying your taxes. In addition, you will transfer the money into the account you will use to make your first investments. [14]
Ask for help in the beginning. Seek the counsel of a professional or a financially experienced friend or relative. Don't be too proud to admit you don't know everything already. Lots of people would love to help you avoid early mistakes.
Avoid the temptation of high-risk, fast-return investments, especially in the early stages of your investing activities when you could lose everything in one bad move.
Keep track of your investments for tax and budget purposes. Having clear, easily accessible records will make things much easier for you later on.
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Shared Flashcard Set
A firm has basic earnings per share of $1.29. If the tax rate is 30%, which of the following securities would be dilutive? Cumulative 8%, $50 par preferred stock. Ten percent convertible bonds, issued at par, with each $1,000 bond convertible into 20 shares of common stock. Seven percent convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock. Six percent, $100 par cumulative convertible preferred stock, issued at par, with each preferred share convertible into four shares of common stock.
Seven percent convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock.
n computing diluted earnings per share (DEPS), the equivalent number of shares of convertible preferred stock is added as an adjustment to the denominator (number of shares outstanding). If the preferred stock is preferred as to dividends, which amount should be added as an adjustment to the numerator (earnings available to common shareholders)? Annual preferred dividend. Annual preferred dividend times (1 – the income tax rate). Annual preferred dividend times the income tax rate. Annual preferred dividend divided by the income tax rate.
Annual preferred dividend.
The market price of a bond issued at a discount is the present value of its principal amount at the market (effective) rate of interest Less the present value of all future interest payments at the market (effective) rate of interest. Less the present value of all future interest payments at the rate of interest stated on the bond. Plus the present value of all future interest payments at the market (effective) rate of interest. Plus the present value of all future interest payments at the rate of interest stated on the bond
Plus the present value of all future interest payments at the market (effective) rate of interest.
Album Co. issued 10-year $200,000 debenture bonds on January 2. The bonds pay interest semiannually. Album uses the effective interest method to amortize bond premiums and discounts. The carrying amount of the bonds on January 2 was $185,953. A journal entry was recorded for the first interest payment on June 30, debiting interest expense for $13,016 and crediting cash for $12,000. What is the annual stated interest rate for the debenture bonds? 6% 7% 12% 14%
A company issues bonds at 98, with a maturity value of $50,000. The entry the company uses to record the original issue should include which of the following? A debit to bond discount of $1,000. A credit to bonds payable of $49,000. A credit to bond premium of $1,000. A debit to bonds payable of $50,000.
A debit to bond discount of $1,000.
On January 31, Year 4, Beau Corp. issued $300,000 maturity value, 12% bonds for $300,000 cash. The bonds are dated December 31, Year 3, and mature on December 31, Year 13. Interest will be paid semiannually on June 30 and December 31. What amount of accrued interest payable should Beau report in its September 30, Year 4, balance sheet? $27,000 $24,000 $18,000 $9,000
Webb Co. has outstanding a 7%, 10-year bond with a $100,000 face amount. The bond was originally sold to yield 6% annual interest. Webb uses the effective-interest method to amortize bond premium. On June 30, Year 3, the carrying amount of the outstanding bond was $105,000. What amount of unamortized premium on the bond should Webb report in its June 30, Year 4, balance sheet? $1,050 $3,950 $4,300 $4,500
On January 2, Vole Co. issued bonds with a face value of $480,000 at a discount to yield 10%. The bonds pay interest semiannually. On June 30, Vole paid bond interest of $14,400. After Vole recorded amortization of the bond discount of $3,600, the bonds had a carrying amount of $363,600. What amount did Vole receive upon issuing the bonds? $360,000 $367,200 $476,400 $480,000
During Year 4, Eddy Corp. incurred the following costs in connection with the issuance of bonds: Printing and engraving $ 30,000 Legal fees 160,000 Fees paid to independent accountants for registration information 20,000 Commissions paid to underwriter 300,000 What amount should be recorded as a deferred charge to be amortized over the term of the bonds? $510,000 $480,000 $300,000 $210,000
On March 1, Year 1, Somar Co. issued 20-year bonds at a discount. By September 1, Year 6, the bonds were quoted at 106 when Somar exercised its right to retire the bonds at 105. How should Somar report the bond retirement on its Year 6 income statement? A gain in continuing operations. A loss in continuing operations. An extraordinary gain. An extraordinary loss.
A loss in continuing operations.
On June 2, Year 1, Tory, Inc. issued $500,000 of 10%, 15-year bonds at par. Interest is payable semiannually on June 1 and December 1. Bond issue costs were $6,000, and Tory uses the straight-line method of amortizing bond issue costs. On June 2, Year 6, Tory retired half of the bonds at 98. What is the net carrying amount that Tory should use in computing the gain or loss on retirement of debt? $250,000 $248,000 $247,000 $246,000
On January 1, Year 1, Fox Corp. issued 1,000 of its 10%, $1,000 bonds for $1,040,000. These bonds were to mature on January 1, Year 11, but were callable at 101 anytime after December 31, Year 4. Interest was payable semiannually on July 1 and January 1. On July 1, Year 6, Fox called all of the bonds and retired them. Bond premium was amortized on a straight-line basis. Fox’s gain or loss in Year 6 on this early extinguishment of debt was a $30,000 gain. $22,000 gain. $10,000 loss. $8,000 gain.
On January 1, Year 2, Pine Corp. sold 200 of its 8%, $1,000 bonds at 97 plus accrued interest. The bonds are dated October 1, Year 1, and mature on October 1, Year 11. Interest is payable semiannually on April 1 and October 1. Accrued interest for the period October 1, Year 1, to January 1, Year 2, amounted to $4,000. On January 1, Year 2, Pine should report bonds payable, net of discount, at $196,000 $194,150 $194,000 $190,150
When the effective interest method of amortization is used for bonds issued at a premium, the amount of interest payable for an interest period is calculated by multiplying the Face value of the bonds at the beginning of the period by the contractual interest rate. Face value of the bonds at the beginning of the period by the effective interest rates. Carrying value of the bonds at the beginning of the period by the contractual interest rate. Carrying value of the bonds at the beginning of the period by the effective interest rates.
Face value of the bonds at the beginning of the period by the contractual interest rate.
Which of the following is generally associated with the terms of convertible debt securities? An interest rate that is lower than nonconvertible debt. An initial conversion price that is less than the market value of the common stock at time of issuance. A noncallable feature. A feature to subordinate the security to nonconvertible debt.
An interest rate that is lower than nonconvertible debt.
A 5-year term bond was issued on January 1, Year 1, at a discount. The carrying amount of the bond at December 31, Year 2, will be Higher than the carrying amount at December 31, Year 1. Lower than the carrying amount at December 31, Year 1. The same as the carrying amount at January 1, Year 1. Higher than the carrying amount at December 31, Year 3.
Higher than the carrying amount at December 31, Year 1.
A company issued a bond with a stated rate of interest that is less than the effective interest rate on the date of issuance. The bond was issued on one of the interest payment dates. What should the company report on the first interest payment date? An interest expense that is less than the cash payment made to bondholders. An interest expense that is greater than the cash payment made to bondholders. A debit to the unamortized bond discount. A debit to the unamortized bond premium.
An interest expense that is greater than the cash payment made to bondholders.
In Year 1, a company reported in other comprehensive income an unrealized holding loss on an investment in available-for-sale securities. During Year 2, these securities were sold at a loss equal to the unrealized loss previously recognized. The reclassification adjustment should include which of the following? The unrealized loss should be credited to the investment account. The unrealized loss should be credited to the other comprehensive income account. The unrealized loss should be debited to the other comprehensive income account. The unrealized loss should be credited to beginning retained earnings.
The unrealized loss should be credited to the other comprehensive income account.
In Year 5, Lee Co. acquired, at a premium, Enfield, Inc. 10-year bonds as a long-term investment. At December 31, Year 6, Enfield’s bonds were quoted at a small discount. Which of the following situations is the most likely cause of the decline in the bonds’ fair value? Enfield issued a stock dividend. Enfield is expected to call the bonds at a premium, which is less than Lee’s carrying amount. Interest rates have declined since Lee purchased the bonds. Interest rates have increased since Lee purchased the bonds.
Interest rates have increased since Lee purchased the bonds.
On January 1, Year 1, Purl Corp. purchased as a long-term investment $500,000 face amount of Shaw, Inc.’s 8% bonds for $456,200. The bonds were purchased to yield 10% interest. The bonds mature on January 1, Year 6, and pay interest annually on January 1. Purl uses the effective interest method of amortization. What amount (rounded to nearest $100) should Purl report on its December 31, Year 2, balance sheet for these held-to-maturity bonds? $468,000 $466,200 $461,800 $456,200
An investor uses the equity method to account for an investment in common stock. After the date of acquisition, the investment account of the investor is Not affected by its share of the earnings or losses of the investee. Not affected by its share of the earnings of the investee, but is decreased by its share of the losses of the investee. Increased by its share of the earnings of the investee, but is not affected by its share of the losses of the investee. Increased by its share of the earnings of the investee, and is decreased by its share of the losses of the investee.
Increased by its share of the earnings of the investee, and is decreased by its share of the losses of the investee.
On January 1, Point, Inc. purchased 10% of Iona Co.’s common stock. Point purchased additional shares bringing its ownership up to 40% of Iona’s common stock outstanding on August 1. During October, Iona declared and paid a cash dividend on all of its outstanding common stock. How much income from the Iona investment should Point’s income statement report? 10% of Iona’s income for January 1 to July 31 plus 40% of Iona’s income for August 1 to December 31. 40% of Iona’s income for August 1 to December 31 only. 40% of Iona’s income. Amount equal to dividends received from Iona.
10% of Iona’s income for January 1 to July 31 plus 40% of Iona’s income for August 1 to December 31.
When an investor uses the equity method to account for investments in common stock, the investment account will be increased when the investor recognizes A proportionate interest in the net income of the investee. A cash dividend received from the investee. Periodic amortization of the goodwill related to the purchase. Depreciation related to the excess of fair value over the carrying amount of the investee’s depreciable assets at the date of purchase by the investor.
A proportionate interest in the net income of the investee.
Larkin Co. has owned 25% of the common stock of Devon Co. for a number of years and has the ability to exercise significant influence over Devon. The following information relates to Larkin’s investment in Devon during the most recent year: Carrying amount of Larkin’s investment in Devon at the beginning of the year $200,000 Net income of Devon for the year 600,000 Total dividends paid to Devon’s stockholders during the year 400,000 What is the carrying amount of Larkin’s investment in Devon at year end? $100,000 $200,000 $250,000 $350,000
An investor purchased a bond as a long-term investment on January 2. The investor’s carrying amount at the end of the first year will be highest if the bond is purchased at a Discount and amortized by the straight-line method. Discount and amortized by the effective interest method. Premium and amortized by the straight-line method. Premium and amortized by the effective interest method.
Premium and amortized by the effective interest method.
On January 2, Year 4, Early Co. purchased as a short-term investment a $1 million face amount Thomas Co. 8% bond for $910,000 to yield 10%. The bonds mature on January 1, Year 11, and pay interest annually on January 1. On December 31, Year 4, the bonds had a fair value of $945,000. On February 13, Year 5, Early sold the bonds for $920,000. In its December 31, Year 4, income statement, what amount should Early report in earnings as a gain or loss on the bond, if it elected the fair value option (FVO) on January 2, Year 4? $35,000 $24,000 $(1,000) $0
On July 1, Year 1, Cody Co. paid $1,198,000 for 10%, 20-year bonds with a face amount of $1 million. Interest is paid on December 31 and June 30. The bonds were purchased to yield 8%. Cody uses the effective interest rate method to recognize interest income from this investment. The bonds are properly classified as held-to-maturity. What should be reported as the carrying amount of the bonds in Cody’s December 31, Year 1, balance sheet? $1,207,900 $1,198,000 $1,195,920 $1,193,050
The following information was extracted from Gil Co.’s December 31 balance sheet: Noncurrent assets: Available-for-sale securities (carried at fair value) $96,450 Equity: Accumulated other comprehensive income (OCI) Unrealized gains and losses on available-for-sale securities (19,800) Historical cost of the available-for-sale securities was $63,595 $76,650 $96,450 $116,250
When the fair value of an investment in debt securities exceeds its amortized cost, how should each of the following debt securities be reported at the end of the year, given no election of the fair value option?
Debt Securities Classified As Held-to-Maturity Available-for-Sale
Amortized cost Amortized cost
Amortized cost Fair value
Fair value Fair value
Fair value Amortized cost
Amortized cost Fair value
Securities held primarily for sale in the near term to generate income on short-term price differences are known as Available-for-sale securities. Equity securities. Held-to-maturity securities. Trading securities.
Unrealized gains and losses on trading securities should be presented in the Statement of financial position. Income statement. Notes to the financial statements. Statement of retained earnings.
An investor purchased a bond classified as a long-term investment between interest dates at a discount. At the purchase date, the carrying amount of the bond is more than the
Cash Paid Face Amount to Seller of Bond
Under IFRS, all of the following are conditions that must be met for recognizing revenue from a sale of goods, except Transaction costs can be reliably measured. The entity has transferred the significant risks and rewards of ownership. The entity has received the full consideration from the sale. The amount of the transaction can be reliably measured.
The entity has received the full consideration from the sale.
Which of the following is a difference between IFRS and U. S. GAAP regarding revenue recognition? IFRS allow both the percentage-of-completion and completed contract methods. IFRS have different requirements for a sale of goods or performance of a service. IFRS contain more detailed requirements than U. S. GAAP. Both sets of standards use the same requirements.
IFRS have different requirements for a sale of goods or performance of a service.
According to IFRS, when a complete set of financial statements is presented, how are other comprehensive income (OCI) and its components reported?
May be reported in a single statement of comprehensive income or disclosed in a statement of changes in equity. Must be reported in a separate statement.
Must be reported in a separate statement or in a single statement of comprehensive income reporting all items of income and expense for the period.
They are not required to be reported under IFRS.
Must be reported in a separate statement or in a single statement of comprehensive income reporting all items of income and expense for the period.
Which of the following items should be reported in other comprehensive income (OCI)?
Unrealized loss on an investment classified as a trading security.
Unrealized loss on an investment classified as an available-for-sale security.
Realized loss on an investment classified as an available-for-sale security.
Cumulative effect of a change in accounting principle.
Unrealized loss on an investment classified as an available-for-sale security.
On a statement of comprehensive income prepared in accordance with IFRS, which of the following line items is not included? Finance costs. Extraordinary items. Tax expense. Revenue.
State Co. recognizes construction revenue and expenses using the percentage-of-completion method. During Year 6, a single long-term project was begun, which continued through Year 7. Information on the project follows:
Year 6 Year 7 Accounts receivable from construction contract $100,000 $300,000 Construction costs incurred 105,000 192,000 Construction in progress 122,000 364,000 Partial billings on contract 100,000 420,000 Gross profit recognized from the long-term construction contract in Year 7 should be $50,000 $108,000 $120,000 $228,000
How should the balances of progress billings and construction in progress be shown at reporting dates prior to the completion of a long-term contract? Progress billings as deferred income, construction in progress as a deferred expense. Progress billings as income, construction in progress as inventory. Net, as a current asset if debit balance and current liability if credit balance. Net, as gross profit from construction if credit balance, and loss from construction if debit balance.
Net, as a current asset if debit balance and current liability if credit balance.
A company began work on a long-term construction contract in Year 1. The contract price was $3,000,000. Year-end information related to the contract is as follows: Year 1 Year 2 Year 3 Estimated total cost $2,000,000 $2,000,000 $2,000,000 Cost incurred 700,000 900,000 400,000 Billings 800,000 1,200,000 1,000,000 Collections 600,000 1,200,000 1,200,000 Under the percentage-of-completion method, the gross profit to be recognized in Year 1 is $(100,000) $100,000 $200,000 $350,000
A building contractor has a fixed-price contract to construct a large building. It is estimated that the building will take 2 years to complete. Progress billings will be sent to the customer at quarterly intervals. Which of the following describes the preferable point for revenue recognition for this contract if the outcome of the contract can be estimated reliably? After the contract is signed. As progress is made toward completion of the contract. As cash is received. When the contract is completed.
As progress is made toward completion of the contract.
Which of the following is used in calculating the gross profit recognized in the fourth and final year of a contract accounted for by the percentage-of-completion method?
Actual Gross Profit Total Costs Previously Recognized
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The One Stock to Buy for the Next Ten Years
The Motley Fool is sending out an ad that claims to have chosen “ The Only Stock to Own 2009-2019 .”
Now there’s a promise, no? The assumption of almost all pundits and pontificators, myself included, is that this awful market might represent a remarkable buying opportunity — at least, an opportunity for those who make the right decisions, and have a long time to wait for that “rightness” to emerge from the ashes of this recession.
But what to buy? What company represents the “right” decision right now?
Dave and Tom Gardner at the Motley Fool have the answer for you — the “one stock to buy for the next ten years,” which of course doesn’t sound much different than other predictions that have been seen in this space over the last few years, almost all of which would have been awful if you marked them to today’s market price.
They’d like you to sign up for a subscription to their Stock Advisor newsletter, and in return they’ll tell you about the best stock to buy right now, the stock that will perform better than the others from 2009 to 2019.
Or actually, they’ll tell you about the best two stocks to buy right now, since each issue of the newsletter is essentially a competition between the two brothers to see which of them can make the best recommendation. Stock Advisor, by the way, is the flagship newsletter of the Motley Fool, and by far their best long-term performer, though it doesn’t take remarkable returns to be a top performer these days (according to them, it’s the only one of their newsletters that currently has a positive lifetime return, probably in large part because it is their oldest newsletter — Hulbert hasn’t covered them for as long, but his numbers generally agree that they’ve slightly beaten the market and have a long term positive return).
So whether or not you think their advice is worth buying, what are they talking about when they tease us that they have “Your First Stock of the Next Bull Market?”
Here’s the promise:
“… stocks that are right now coiled like a spring, that will shoot upward in the not-too-distant future… dropping a long and substantial string of profits into your account. And they’re detailed straight ahead!”
Now, you can go ahead and subscribe to the Stock Advisor if you want their full writeup … but if you just want to know about these two companies, well, you know the drill: Read on, and the Gumshoe will provide.
We start with Tom Gardner — the brother who has more of a value focus. Dave Gardner has been running the Rule Breakers newsletter that looks for breakout growth stocks, and before that was a big cheerleader for many of the 1990s tech titans (including some incredible returns); Tom Gardner has been in charge of the Hidden Gems newsletter, which looks for “hidden” small cap value companies, and generally looks more for the Warren Buffett-type buys. That’s an exaggeration of their stock-picking history, but it’s generally true that Dave is the growth guy, Tom is the value guy.
And Tom has this for us:
“First, let’s take a look at my top recommendation for 2009 and beyond…
“To tell this story, we need to go back 35 years to 1973. To a period of crisis and opportunity… a period like what we’re experiencing today.
“In 1973, a company called Scientific Atlanta planned to sell portable satellite earth stations to companies in the rapidly growing cable television field. Yet at the time, many of the so-called experts of the day thought satellite transmission of cable television would take place only in the way out distant future.
“As is often the case when a bunch of “experts” prognosticate in unison on a subject… their prediction proved dead wrong! And cable television boomed in the mid - to late 1970s, and Scientific Atlanta grew with it…”
OK, so this stock is somehow a bit comparable to Scientific Atlanta 35 years ago (they’re owned by Cisco now, just FYI), in that it apparently is undervalued and hidden, and under-appreciated because it wasn’t obvious to everyone that their business would be a success.
“The company’s profits ballooned by 40% a year from 1972 on, as Scientific Atlanta came to dominate a mundane niche inside a larger communications revolution!
“As a result, Scientific Atlanta’s stock soared. And keep in mind, this happened during the brutal economy of the 1970s!”
So that sounds pretty good, right? Unfortunately, we’re bereft of a time machine at the moment, and even if we were willing to relive 1973, we can’t go back and buy Scientific Atlanta and make our millions.
So what is the stock Tom’s teasing today?
“Right now, I’m recommending you stuff your portfolio with shares of a 2009 opportunity I see as having similar characteristics and potential as Scientific Atlanta had in 1973! We’re talking a company with:
“Unique and proprietary products that give it strong pricing power and outstanding margins (just as Scientific Atlanta had )
“The high end of a tech infrastructure-type market that’s a brutal place for new competitors (like Scientific Atlanta had )
“Expert management (you guessed it… same as Scientific Atlanta had back in the day )
“In fact, the company I’m recommending has a CEO with more than two decades of experience and a chairman and co-founder who’s been in the industry for 40 years!”
OK, so that sounds lovely — but of course there are precious few actual clues in there … let’s dig in for a few specifics:
It builds analog integrated circuits that “deal with features such as pressure, temperature, and voltage that are difficult to break down into digital components. Put simply: They do what digital can’t.”
They target the high end of the analog market.
They have consistentlyr eported net margins “near 40%” whcih Tom says is “astounding for a circuit manufacturer”
Their CEO recently explained that “a new company is not going to get a lot of funding to address the ‘relatively small amounts of customers and relatively low unit sales’ involved in this space.”
More than 15,000 customers, none of which accounts for more than 10% of sales. US is 32% of sales, Europe 18%, Japan 12%, rest of Asia 37%. Tom says that “this strong diversification helps the company ride out economic downturns in any one industry or geographic area.”
(He doesn’t mention that those 37% of sales to “rest of Asia” may largely be to assemblers who are building stuff that’s sold to Europe, Japan, and the U. S. but that’s neither here nor there.)
What does Tom see for this one ahead?
“20% annualized returns for shareholders over the next five years.”
Now, that may not sound like an awesome return compared to the incredible “500% gain in a year” promises that we often see in this space. And one might hope for a bit more, especially coming out of the trough that we’re living in right now, but it is admirably both reasonable and exciting — after a year of 80% losses for many shareholders, 20% a year on the positive end sounds pretty good, even if it will take all five of those years at that rate of return, plus four more, to make back that 80% loss (this awful year in the market isn’t Tom’s responsibility, of course, just making the point that 20% returns may sound both unattainable and conservative at the same time to shell-shocked investors). Stock Advisor is down about 40% over the past year, which is better than the S&P 500 and about the same as the Wilshire 5000.
Tom calls this “The One Niche Tech Stock for 2009 and Beyond.”
Linear Technology Corp (LLTC)
The shares are flying this morning, probably in at least some measure because of the big ad campaign behind this teaser — they must be getting a fair number of folks excited by this stock, who are then signing up for the newsletter (or gumshoeing it on their own — don’t do this at home!) and throwing down their cash for a few shares. Then again, does a stock really need a reason to move by 7% anymore?
This is indeed a big ($5 billion or so) analog circuit maker, competing with companies like Analog Devices and National Semiconductor. And at this point, at least, they seem to be doing quite well — their margins are significantly better than those of Analog Devices, which to an inexpert eye like mine (I know this business almost not at all) looks like the closest comparable company. That could certainly be because Linear is a bit higher up the food chain, selling into higher end products with more differentiated chips, but I don’t really know for sure — LLTC has operating margins that are twice that of Analog Devices or National Semiconductor, so there is clearly a difference to their business … at least so far. They also have better sales growth and a significantly higher PE, though of course a year ago no one would have been able to say “high” about a Price/Earnings ratio of about 11, which is where LLTC stands now, with very similar valuation metrics to the much larger Intel (though with higher margins).
Is this going to be a company that can survive a big recession? Clearly if sales of electronic gear go down, so will LLTC’s sales — that’s why the shares of all chipmakers are inexpensive right now. LLTC has minimal debt (though unlike some in the business, they do not have a net cash position — they do have a slight amount of net debt), and they pay a decent and growing dividend (over 4% — it’s still hard to believe that chip companies pay real dividends now, even Intel has a similar yield above 4%, too).
I can’t give you an expert opinion on where their products stand, or what their competitive position is, but I can tell you that Tom Gardner’s anointing this as the top stock for the next ten years … and there is nothing in the valuation or in their numbers that would necessarily make you run screaming from the room. They’ve had their share of downgrades and estimate cuts from analysts this quarter, and are currently, as with most stocks that are enjoying a bit of a December rally, up a bit from the lows of last month. They report their second quarter on January 13, and analysts think they’ll earn about $1.50 a share this year (which ends in June for them), and they’re factoring in almost no growth for the year following.
If you’ve got something to share about Linear Technology, feel free to spread the knowledge with a comment below — I’m intrigued, but don’t know enough about them yet to really think about buying.
And I said there would be two goodies for you today:
Tom’s brother, David, also has his pick for the next ten years — and this one we’ve seen before. He’s been selling this idea as an investment in “The New Silk Road” for a few months now, and I wrote a piece decoding that original ad back in October — you can read that New Silk Road article here. or if you just want the short answer …
This second one is Canadian National Railway (CNI)
I don’t have any other exciting news to share about CNI, though the shares are down about 10% or so since I last shared some thoughts. Certainly, railroad investing has enjoyed a real renaissance in the last several years, thanks in large part to high oil prices, commodities, and the increase in the container trade. Before that, and before Warren Buffett’s big railroad purchases in recent years, the shares spent many decades being solid performers that most investors had never heard of … will they go back there?
That’s hard to answer, but I think we should at least call some attention to one thing: Of the two Gardner brothers it’s the growth-crazy, AOL and Nvidia-loving Dave Gardner who chooses a railroad, and the cautious, tepid value-seeker Tom Gardner who selects a semiconductor company.
In a topsy turvy world like this, I guess that kind of switcheroo should be expected … but it still makes one take pause. ¿Qué piensas?
Dear Daily Crux Reader,
Stop buying gold until you read this…
No more mining stocks or gold mutual funds.
One of the best analysts in America says there is one gold investment that’s better than all others and could have even turned a $5,000 investment into $1.6 million.
Full write-up below…
Brian Hunt Editor and Chief, Daily Crux
Canadian Engineer Uncovers Secret to Making 4,500% From Gold—Without Owning a Single Mining Stock
Forget mining stocks, mutual funds, and gold coins—there’s a much safer and more lucrative way to make a fortune in the gold industry over the next two years.
I’ll give you the exact stock symbol of this perfect investment, here in this letter.
Forbes Magazine says this opportunity returned 32,000% over 18 years… that turns a $5,000 investment into $1.6 million!
For good reason, the world has gone crazy for gold.
It’s one of the few safe “buy-and-hold” investments available in the world today.
But very few investors know about THE PERFECT GOLD INVESTMENT.
It is probably the safest and most lucrative investment you can make in the gold industry—yet it has nothing to do with mining stocks… or gold mutual funds… or gold bullion or coins.
During one recent period, for example, this incredible gold investment returned 38% a year… for 18 straight years!
That pays you more than 2,400% over 10 years… and more than 32,000% over the full 18 years. It turns just $5,000 into $1.6 million. In short, this has been one of the safest and most profitable investments on Earth.
It’s no surprise, of course, that some people are already making a lot of money as a result…
Jeff Wilkinson, from Kentucky made $1.2 million in only a few years from this investment
Lou Ganders from Baton Rouge, LA profited $909,000 and didn’t have to worry about any of the hassles of storing or handling gold
Jack Vacia, a teacher from Portland, Maine, said, “I tripled my money…”
The secret gold investment I want to tell you about was pioneered by a Canadian named Pierre Lassonde.
If you haven’t heard of Lassonde, don’t be surprised. Most Americans haven’t. He was born in Montreal and came to the United States to work as an engineer.
While working in the U. S. he fell in love with the state of Nevada because of its skiing and also because of its mineral resource potential.
You see, Lassonde knew Nevada held huge amounts of untapped gold wealth that was just begging to be exploited for millions of dollars.
But the genius behind Lassonde’s unique investment has absolutely nothing to do with the risky, expensive, and complicated mining business.
And you could use his secret to make a fortune over the next few years.
Let me give you the exact ticker symbol of this investment, and explain how it works…
Lassonde’s Secret, Revealed
It all started with a tiny advertisement placed in a small Nevada newspaper.
Pierre Lassonde noticed an ad in which the owner of a mine wanted to sell an “interest” in his stake, in order to repay an outstanding loan.
Lassonde and his partner gave the mine owner some cash and became the owner of a percentage of the mine’s future royalties, in return.
Shortly after the ink was dry on the agreement, a large mining operation purchased the project, and discovered one of North America’s biggest gold deposits… The Goldstrike mine.
And the Goldstrike mine delivered Lassonde and his partner the “jackpot” of a lifetime.
If you had invested $5,000 in Lassonde’s company when it first went public, you could have made over $1.6 million.
In short, the secret that Lassonde discovered was “Mining Royalties”—that is, simply a right to receive a percentage of production from a lucrative gold mine. Lassonde and his business partner had previously made a fortune collecting royalties in the oil and gas business. So they deciced to replicate their success in the gold sector…
They created a company, called Franco Nevada. It’s listed on the Toronto Stock Exchange, and the ticker symbol is FNV. TO.
It is the perfect business model for several reasons.
Let me show you what I mean…
The Anatomy of a Perfect Business
Not only did Pierre Lassonde make a ton of money, and make a lot of people rich. He also created what I believe is the perfect business model for the mining industry.
Here are the advantages of collecting royalties over typical mining, exploration, and production companies…
1) PAY ONCE—GET PAID FOR LIFE
You only have to buy a royalty once, then never have to spend another penny as you collect money throughout the life of a mine.
For example, Lassonde paid $2 million for 4% of the Goldstrike mine in Nevada. The first year the mine brought his company $505,304. And today they still get royalty revenues of $74 million a year… all from an initial $2 million dollar investment.
Lassonde also bought a royalty on a gold mine in California called Castle Mountain. His one-time investment was $2.8 million and he wound up making $8.4 million in royalties.
On a recent royalty on a Montana mine, Lassonde and his partners invested $36 million and made a quick $17 million from royalties. They believe the mine should be good for $12 million a year for the next 50 years… that’s a total of $600 million from a one-time investment of $36 million.
2) VIRTUALLY NO OVERHEAD
The problem with the mining business is that it’s EXTREMELY captital intensive. The entire process to build a mine and produce gold can take ten years or more and cost hundreds of millions if not billions of dollars.
Royalty companies, on the other hand, are a cash cow business because they have little overhead and require very few employees. In fact, Franco Nevada has only 21 full-time employees and it’s a $2.7 billion dollar company!
In contrast, look at how many employees most businesses need, to make half this amount of money. Rite Aid Pharmacies, for example, is a $1.4 billion dollar company. They have 53,669 employees!
3) NO PRODUCTION COSTS
Another great advantage of royalty companies is that they don’t have to worry about building and operating mines. Or financing huge pieces of equipment.
Consider Barrick Gold, for example, one of the largest gold mine operators in the world. Their profit margin is just 8.27% because of their incredible overhead. But a royalty company, like the one I’ll mention in a minute, can operate with just a handful of employees, and a single office, and enjoy profit margins of 53.3%.
4) INVESTMENT SAFETY
Another advantage of royalty companies is that they allow you to diversify your holdings, so your eggs are never in just one basket.
Pierre Lassonde’s Franco Nevada, for example, currently has more than 300 royalty interests all over the world. Should one mine stop producing it’s no big deal, because you still have 299 royalties that can bring in money. The point is, royalties from many operations are much, much safer than having to rely on just a handful of mines… where unexpected events can wipe out half of your investment.
5) INFLATION PROTECTION
Royalty companies don’t worry about inflation or increased costs.
You see, even if a mine operator has to start paying $10,000 more for its trucks this year, this cost hike does not affect a royalty company, because they continue to get their legally obligated royalties…no matter what.
In 2008, for example, gold mining production costs increased 24%, but none of these costs had an impact on royalty companies.
In fact, inflation can actually benefit a royalty company. When gold goes up 10% or 20%, the company’s revenue goes up 10% or 20%, but their costs don’t budge. And keep in mind, massive inflation may be on the horizon. It’s important to remember that in the inflation of the 1970’s, gold increased in value by more than 2,000%.
6) LIQUIDITY—EASY TO BUY AND SELL
As many Americans are finding out the hard way in the real estate business, liquidity is one of the absolute top requirements for any great investment.
Well, royalties are a lot easier to sell than mines or land. A royalty can typically be sold on very short notice. When the time comes to collect a profit… it takes only a day or two to get paid.
Simply put, owning a royalty is the least risky investment you can make in the mining business.
As my friend and legendry mineral investor Doug Casey recently said, “royalty companies are the least risky gold stocks… royalty companies buy a fixed percentage interest in a mine’s gross production and let the mining company do the dirty work. They’re conservative, and when gold takes off… profit margins of such companies will soar.”
The point of all this is… owning mining royalties are the perfect business because there’s little risk, low overhead, and huge profit margins.
As I mentioned, the first company to set up this type of operation was Pierre Lassonde’s Franco Nevada. The company was started in 1982, and early investors could have turned a $5,000 investment into $1.6 millon dollars.
Since Lassonde created this business model, however, several other companies have copied it, making a fortune for other savvy investors along the way…
The Royalty Company That Made 65% Last Year…
One of the most successful companies to follow in Lassonde’s footsteps is a firm called Royal Gold.
Royal Gold was started in 1986, and began as an oil and gas exploration company. In 1987 the company shifted its focus to gold royalties, and that’s when investors started to make big profits… a return of 3,295% for those who invested from the beginning.
Today, Royal Gold is the world’s leading precious metal royalty company, and owns a total of 118 royalties on several of the world’s most attractive gold mines.
In fact, they’re still making investors a fortune. Get this: While almost every stock in the world got crushed last year… Royal Gold returned a solid 65%.
Best of all, the mines in which the company owns royalties have reserves of approximately 64 million ounces of gold.
And with gold priced at well over $900 an ounce, that’s over $57 billion dollars in royalty interests the company will get a part of in the near future.
As my colleague Matt Badiali (who’s a geologist with 13 years of experience), says: “Royal Gold is not a mining company. It doesn’t have a fleet of geologists and engineers out scouring the hills. It’s a $1.4 billion accounting firm that takes its payments in gold.”
Again, it’s another example of how owning gold royalties could make you an absolute fortune in the precious metals business… with very little risk.
Royal Gold investors have made well over 3,000% on their investment since the company went public.
If you’re interested in purchasing Royal Gold, it’s listed on the NASDAQ and the stock symbol is RLGD.
The Problem… and a Great Way to Make 1,000%
Before you rush out and buy Royal Gold or Franco Nevada, there’s one thing you have to know…
Franco Nevada and Royal Gold are great companies, sure.
But they’ve been around for more than 20 years.
Yes, they still make investors decent money, but the days of 1,000% gains, I’m afraid, are probably long gone.
But here’s the good news: There is now another chance for you to make absolutely astonishing gains thanks to this incredible business model…
What very few investors know is that in 2003, a small group of investors with a ton of experience in the mining business got together.
They were led by a 28-year industry veteran… who has done all types of important work in this industry… from exploration geologist to mineral economist.
This savvy industry veteran helped form a new royalty company—just like Franco Nevada and Royal Gold. They now own royalties on mines in the U. S. Canada, Chile, Spain, Australia and South Africa, to name just a few.
And… they’ve done something else… which I believe could ultimately make them even more profitable than Franco Nevada or Royal Gold… You see, Franco Nevada and Royal Gold focus almost exclusively on gold mines. Yes, they diversified with various mines around the world, but they live and die based on the price of gold.
However, the company I want to tell you about decided to also diversify into even rarer precious metals… this way they would have even less risk, as precious metals prices fluctuate.
For example, this company owns royalty interests on gold, copper, cobalt, silver, uranium, and even diamond mines.
This company has six huge things going for it, which I believe will make it one of the safest and most profitable stocks in the world over the next few years…
Six Reasons You Could Retire Sooner
By investing in these companies, you get exposure to the world’s most promising gold, silver, diamond and natural resource mines – with more being added to the portfolios all the time.
1) THE BEST BUSINESS MODEL IN THE INDUSTRY
The royalty business model is a proven winner with little risk. Franco Nevada was able to turn every $5,000 invested into over $1.6 million. And while most stocks got slaughtered last year, Royal Gold returned investors 65%. The company I’m sharing with you now, was already up 129% within two years of going public.
2) 20 YEARS OF “WORRY-FREE” INGRESOS
The company I’m recommending you buy owns royalties on some of the most profitable mines in the world for the next 2o years. One of these nickel mines, located in Canada is expected to produce for another 25 years… until 2034.
When asked about the company’s policy of investing in mines with long and stable life spans, the CEO said this…
“Don’t bring me one of those three or four year gold deals and tell me its the best thing since sliced bread, because its not. I’m looking for deals that have 20-year lives or longer”. 3) THE PRECIOUS METALS BOOM
Over the last few years, precious metal prices have skyrocketed. And with the Federal Government flooding this country with trillions of dollars, prices will likely continue to increase thanks to inflation.
In fact, since 2003, gold has increased over 260%, copper has increased 207% and silver has increased 171%.
There is simply no better way to play this bull market over the next few years than owning super-safe mining royalties on the world’s most precious and valuable commodities.
4) FRUGAL MANAGEMENT
I want to own a business where the guy in charge is efficient, frugal, and saves profits for shareholders–not lavish corporate events or furnishings. That’s one of the reasons why I love this new Colorado royalty company.
During a recent annual review of expenses, for example, the CEO noticed that air travel costs had increased significantly. He decided to install video conferencing to save money on airfare and said, “Despite a high-margin business model, [the company] has not lost its cost discipline.”
And get this, despite being a $250 million dollar company, the firm has only 11 employees.
This new Colorado royalty company I’m recommending you buy is well diversified. They own 85 royalties on mines around the world, and the majority of these mines are in stable, developed countries such as the U. S. Canada, Australia, and Spain.
Also, they diversify among precious metals such as gold, copper, cobalt, silver, nickel, and uranium.
6) YOU ARE GETTING IN EARLY
This might be the most critical point about this investment.
This new Colorado royalty company has been around only since 2003. The share price is still well under $5. And the company is in the works of producing some incredible deals for shareholders over the next few years, including…
A copper and gold mine in Spain, for example, is expected to produce for the next 15 years, and a mine in Nebraska should produce for 20 years.
The point is, this company is already an incredible investment, and over the next few years, it is set to pay investors a fortune.
I believe you could invest today and watch your royalty gains pile up to extraordinary sums… for years and years to come.
And because I want you to get in early while there is still a chance to make massive gains on this new royalty company, I have written a Special Report called “One Investment That Can Pay for Your Retirement”.
I’d like to give you access to this report for FREE. It will show you how to buy this company… the ticker symbol… the price to pay… and why you can look forward to a decade or more of huge gains.
I’ll go into very detailed valuation, which shows you exactly why I believe this business is one of the few safe “buy-and-hold” stocks in the world today.
It’s an incredible value… with very little risk… which could pay you hundreds and hundreds of percent gains over the next few years.
Let me show you how to get your FREE copy today of my research…
The King of Royalty Companies
My name is Dan Ferris.
I’m the editor and analyst of Extreme Value, an investment advisory letter that focuses on the safest and cheapest stocks in the market—such as the royalty company I just mentioned to you.
My “Extreme Value” strategy offers what I believe is the single best way to make money in the stock market today… by using only the safest and most profitable investments.
Often times, I’ll spend up to six months researching a stock opportunity… because I won’t make a recommendation unless I find it almost impossible to lose money.
For example, a few years ago I flew to the island of Maui, rented a car, and toured 37,000 acres of sugarcane fields owned by a company called Alexander and Baldwin (symbol: ALEX). I was accompanied by John Moxie, the company’s Vice President of Farming Operations, who showed me each stage of the sugarcane growing process.
After the tour, I went to the Maui Real Property Assessment Division where I found 242 tax records filed under Alexander and Baldwin’s name. I discovered that the real assets owned by the company were selling on the stock market for a small fraction of what they were actually worth on the open market.
Specifically: The company owns 90,600 acres of Hawaiian land, most of it on the islands of Maui and Kauai. And almost all of it is carried on the company’s books at its original average cost of just $150 an acre. Today, some of that land is worth in excess of $1 million per acre…
That’s what I call an “Extreme Value” situación.
Of course I recommended this company to my readers who could have seen gains of 154%. I expect we’ll make considerably more over the next few years as well.
In short, I’ve spent the last several months doing the same type of in-depth research on this new mining royalty company, which I believe could single-handedly pay for your retirement in the next few years.
And the good news is… there are several other incredible “Extreme Value” opportunities out there right now…
How to Safely and Legally Get Paid Thousands of Dollars Thanks to The Tax Man
My research for Extreme Value focuses on finding extraordinary opportunities to make very large gains… with almost no risk.
Well, recently, I’ve found an incredible way to profit, thanks to the tax system.
In short, I’ve found an investment that is better than government bonds, municipal bonds, or just about any savings vehicle on the planet.
I expect you could get paid about 50%-100% on your money over the next few years… with as little risk as is possible in the investment world.
It’s all thanks to something I call “Tax Revenue Shares,” which could potentially pay you a small fortune on about 16% of the tax revenue paid in the U. S.
Some investors have been taking advantage of these “tax revenue shares” for years and have already seen gains as high as 923%.
Even Warren Buffet, the greatest investor of the past 50 years has held this investment, and at one time owned more than $10 million worth.
We all know that the only things certain in life are death and taxes. But most investors don’t have a clue about how to turn the tax system in their favor.
Keep in mind: The payouts from the “tax revenue shares” I’m going to tell you about have increased in value 23 of the past 27 years.
Don’t get me wrong: These “tax revenue shares” will not pay you 500% in one year.
Rather, they are a super-safe investment, perfect for your savings, which could pay you a heck of a lot more than any bond or savings account I know of. Remember, no matter what happens in the economy or the stock market, people have to pay their taxes. And this is how you can get your share.
And I haven’t even told you the best part: You can easily buy these “tax revenue shares” through any ordinary stock broker, or on-line brokerage account. It couldn’t be easier.
I’ve written a report covering everything you need to know about these “revenue shares” called, How to Make Safe 50% Gains From “Tax Revenue Shares.”
Again, I’d like to send you this Research Report immediately, and free of charge.
The research on “tax revenue shares” and the incredible opportunity in the new mining royalty company are actually the first things I’ll send you when you take a risk-free look at my monthly advisory letter, Extreme Value.
This research will help you decide whether or not Extreme Value is right for you.
Here’s what I mean…
Please Be Advised: Extreme Value is not for the average reader.
That’s because my strategy is designed for a small group of readers who are interested in little-known companies often involved in very safe businesses… which still have the potential for very large gains.
In many cases, this could mean getting into a company your broker may not know about… with little-to-no coverage on Wall Street… and then leaving it alone for months at a time.
The investments I follow I usually recommend holding for the long-term… and often get staggering returns as a result. THIS IS IMPORTANT: If you want to take chances day-trading or buying options, or anything like that, my work is definitely not for you.
In short, my goal is to find investments where you can get in at such a low price, with such a margin of safety, that you have the potential to double or triple your money—with little risk involved.
And what’s funny is, even though we focus on very safe “Extreme Value” situations… I don’t know of another research service in the industry that has come anywhere near producing the big gains we’ve found over the past few years.
For example, do you know of any research or speculative service that has shown readers potential gains as high as…
221% on Consolidated Tomoka—real estate and golf operations
53% on Alico—land management
165% on St. Joe—real estate development company in Florida
35% on Korea Electric Power—electric utility company
124% on Gateway—computers
97% on Circuit City—electronics
113% on Tejon Ranch—agriculture and real estate development (By the way, this is a fantastic “buy” again, and I’ve recently recommended that my paid subscribers purchase this stock. It’s listed on the New York Stock Exchange and the ticker symbol is TRC.)
94% on JAKKS Pacific—developer and producer of toys And keep in mind: We found these huge gains while focusing on the safest “Extreme Values” en el mercado.
The point is, most people think you need to trade in and out of risky investments to make big gains.
I think what we’ve proven is that you simply have to do more homework than anyone else… and you have to get into great companies that are trading EXTREMELY cheap… so that you all but eliminate any undue risk.
This is how I operate and why I spend up to 6 months researching a single stock recommendation—so that you can see the kinds of gains I described above.
Of course, what I love most about my work is getting letters like these from subscribers…
“Dan, my results have been as follows: Made $1.01 million in profits, before taxes and expenses.”
Josh Winters, Thornton, CO “I made my first purchase from your recommendations nearly three years ago and have realized a 554% gain on that investment alone. Other big winners for me have been 129%, 100%, and 90%… Keep up the good work!”
Rich Charles, Tacoma, WA
“About $20,000 ahead in just 60 days! Needless to say, these returns have sure beat the recent “market” by a country mile. Extreme Value delivers what it promises! Tell Dan Ferris, I figure that his advice is worth a lot more than the cost of his subscription.”
Hank Dickson, Colby, KS
“During the past year, I have probably achieved gains of about $250,000 on Extreme Value recommendations. As a group, these investments have doubled during that time period.”
Wesley Calleran, Muskegon, Michigan
“I’m very pleased with the results of the Extreme Value portfolio and the amount of research that goes into each recommendation… [it] produced an income exceeding $150,000 per year.”
Curt Randall, New Haven, Connecticut
One more thing I should tell you too…
If you decide to take a look at my work, you will be in good company.
What I mean by that is, not only do every-day readers follow my recommendations for big gains, but so do many professional investment managers… Such as Mohnish Parai, a very wealthy money manager and New York Times best-selling author (who was also featured in Forbes for out-performing Warren Buffet for 4 straight years). He said, “I read Extreme Value every month. It’s one of the best value-oriented advisories I receive.” And Grover Kowalski from Los Angeles, CA, who said, “I am a 37 year retired professional from the investment business that involved bonds, stocks, options, annuities, and life insurance… All I can say is this… we should have had you at the head of our investment department.” If you’d like to give Extreme Value a try, I believe very strongly that you will not be disappointed. I think you could safely make more money with my work than you’ve ever made following any other financial advice from any source.
Here’s how it works…
On the second Friday of every month, I’ll send you a full report (by email and then by regular mail) on extreme-valued investments… the safest and most profitable opportunities in the entire market. Our goal is to make at least 100% gains with each investment. Sometimes it takes just a few weeks for the values to be fully realized… sometimes it can take a year or more.
In short, wherever the best opportunities are, I will find them… so you can get there first and potentially see very safe and large gains.
But before you decide if you would like to try Extreme Value, there is something else I want you to have…
It’s an amazing opportunity I think you’ll find very valuable…
The Finest Beachfront Property in The U. S. For $1,500 An Acre
What if I told you that, thanks to the real estate collapse, you could now own some of the nicest beaches in all of America… for the equivalent of one hundred dollars per acre…
¿Estarías interesado?
Well, I’ve done an incredible amount of research on this opportunity, and I can tell you that this opportunity is very real—and there is nothing else like it in America.
Even better, you can make this real estate investment in the stock market, so it’s super-simple and cheap to buy and sell.
You see, very few investors know it, but there’s a one-of-a-kind stock in this country that does nothing but hold some of the worlds most valuable land… stretches of prime beachfront, in some of the most popular destinations on Earth.
What’s incredible is that due to the real estate meltdown you now have the opportunity to buy this beachfront land at truly distressed prices… 57% less than it was fetching a few years ago.
Look… I’m not one who looks specifically to capitalize on others misfortune… but these prices are far too good to pass up. This is absolutely the real estate buy of a lifetime.
Your kids and grandkids could look back at this investment as the smartest one you ever made.
Yes, there are some other incredible deals in the real estate markets right now… but for most of them, you have to deal with bankers, distressed properties, foreclosures, etc.
Well, this beachfront investment I want to tell you about is safer, easier, and probably more lucrative than anything else you can find on the real estate front today.
That’s why Michael Winer, who might be the best real estate value investor in America (he runs the Third Avenue Real Estate Fund) recently said: “For us, [this company] boils down to some 800,000 acres of spectacular real estate that is ripe for generations of development.”
The point is, this is a way to get in on America’s best real estate, at dirt-cheap prices. I think you could safely double you money over the next few years… And probably make many, many times that over the next decade and beyond.
You most likely won’t have an opportunity to own beachfront land at these prices again in your lifetime… so if you think people will continue to want beachfront land… this is one of the best investments in the world.
I recently finished writing a new Research Report about this ridiculously low-priced beachfront land, called “The World’s Most Desirable Beachfront Land for $1,500 An Acre.”
You can have access to this report-free of charge-within the next 15 minutes.
How to Get Your Trial-Preview
Normally, we charge $1,000 per year for my monthly research.
No, it’s not cheap, but I believe that’s an absolute bargain.
No one… and I mean no one on or off Wall Street, does the type of in-depth research I do to find a single good investment.
That’s why some of the wealthiest and most respected people in finance read Extreme Value.
If you were to put your money with one of these professional managers, you would easily pay two, three, four – or more – times as much as I charge… and frankly, the advice wouldn’t be half as good.
And here’s the best part of all: For a limited time only, I would like to give you the chance to try out my research at a much lower price…
It’s an amazing opportunity I think you’ll find very valuable…
Today, I would like to offer you a 50% off, preview of Extreme Value for just $500.
By taking me up on this offer, you are agreeing only to TRY my work to see if you like it. If not, no problem… we will part ways as friends.
In short: Start a trial subscription today, and you’ll have 90 DAYS to decide whether my research is right for you.
If for whatever reason you want to cancel your subscription in the first ninety days, call our toll-free number and just let us know. We’ll give you a full refund (minus a 10% refund fee).
You see, we want to avoid “tire kickers”- the folks who sign up without any intention of paying. This costs us a small fortune in overhead expenses, especially when we offer special discounts (5o% off) like this one.
As soon as you let me know if you want to take a trial look, you’ll have access to:
12 monthly issues (1 full year) of Extreme Value. On the second Friday of every month, I will send you a full report (by email and regular mail) on what I believe is the best “value” investment in the market so you can act right away.
Research Report #1: One Investment That Can Pay For Your Retirement. Shows you how to see massive gains over the next few months on the new royalty company that could potentially turn every $5,000 invested into $1.6 million.
Research Report #2: How to Make Safe 50% Gains From “Tax Revenue Shares”. The opportunity to get paid a small fortune on about 16% of the tax revenue paid in the U. S. Even Warren Buffet owned $10 million dollars worth of these safe investments at one time.
Research Report #3: The World’s Most Desirable Beachfront Land for $1,500 An Acre. Prime beachfront property in one of the most popular destinations in America. You could buy this pristine land today and potentially double your money over the next few years.
Every Extreme Value issue ever published (going back to 2002)
Extreme Value website access. You will have 24-hour access to the complete archive of Extreme Value Monthly Issues, Special Reports and E-mail Updates.. If all you do is simply read one of these reports and follow just one recommendation—your subscription could easily pay for itself many times over… with very little risk.
To get started, and to get instant access to all of the investment research I described in this letter, click here.
Dan Ferris Editor, Extreme Value August, 2009
PD Remember – we’re making this special 50% off preview price available to you for a limited time. If you’ve ever wanted to try Extreme Value, there has never been a better time than now. See the order form on the next page for our money back guarantee.
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32,000%? From: DailyWealth (customerservice@stansberryresearch. com) Sent: Wednesday, August 12, 2009 8:19:07 PM To: j963@hotmail. com
Dear DailyWealth Subscriber,
One of our top analysts says he’s come across the single best way to invest in gold…
In fact, one of these investments returned 38% a year for 18 straight years (that’s a 32,000% gain… and turns every $5,000 invested into $1.6 million).
Is this unique gold investment for you? I’ll let you judge for yourself. See Dan Ferris’ full write-up below…
Brian Hunt Editor in Chief, DailyWealth
Canadian Engineer Uncovers Secret to Making 4,500% From Gold—Without Owning a Single Mining Stock
Forget mining stocks, mutual funds, and gold coins—there’s a much safer and more lucrative way to make a fortune in the gold industry over the next two years.
I’ll give you the exact stock symbol of this perfect investment, here in this letter.
Forbes Magazine says this opportunity returned 32,000% over 18 years… that turns a $5,000 investment into $1.6 million!
For good reason, the world has gone crazy for gold.
It’s one of the few safe “buy-and-hold” investments available in the world today.
But very few investors know about THE PERFECT GOLD INVESTMENT.
It is probably the safest and most lucrative investment you can make in the gold industry—yet it has nothing to do with mining stocks… or gold mutual funds… or gold bullion or coins.
During one recent period, for example, this incredible gold investment returned 38% a year… for 18 straight years!
That pays you more than 2,400% over 10 years… and more than 32,000% over the full 18 years. It turns just $5,000 into $1.6 million. In short, this has been one of the safest and most profitable investments on Earth.
It’s no surprise, of course, that some people are already making a lot of money as a result…
Jeff Wilkinson, from Kentucky made $1.2 million in only a few years from this investment
Lou Ganders from Baton Rouge, LA profited $909,000 and didn’t have to worry about any of the hassles of storing or handling gold
Jack Vacia, a teacher from Portland, Maine, said, “I tripled my money…”
The secret gold investment I want to tell you about was pioneered by a Canadian named Pierre Lassonde.
If you haven’t heard of Lassonde, don’t be surprised. Most Americans haven’t. He was born in Montreal and came to the United States to work as an engineer.
While working in the U. S. he fell in love with the state of Nevada because of its skiing and also because of its mineral resource potential.
You see, Lassonde knew Nevada held huge amounts of untapped gold wealth that was just begging to be exploited for millions of dollars.
But the genius behind Lassonde’s unique investment has absolutely nothing to do with the risky, expensive, and complicated mining business.
And you could use his secret to make a fortune over the next few years.
Let me give you the exact ticker symbol of this investment, and explain how it works…
Lassonde’s Secret, Revealed
It all started with a tiny advertisement placed in a small Nevada newspaper.
Pierre Lassonde noticed an ad in which the owner of a mine wanted to sell an “interest” in his stake, in order to repay an outstanding loan.
Lassonde and his partner gave the mine owner some cash and became the owner of a percentage of the mine’s future royalties, in return.
Shortly after the ink was dry on the agreement, a large mining operation purchased the project, and discovered one of North America’s biggest gold deposits… The Goldstrike mine.
And the Goldstrike mine delivered Lassonde and his partner the “jackpot” of a lifetime.
If you had invested $5,000 in Lassonde’s company when it first went public, you could have made over $1.6 million.
In short, the secret that Lassonde discovered was “Mining Royalties”—that is, simply a right to receive a percentage of production from a lucrative gold mine. Lassonde and his business partner had previously made a fortune collecting royalties in the oil and gas business. So they deciced to replicate their success in the gold sector…
They created a company, called Franco Nevada. It’s listed on the Toronto Stock Exchange, and the ticker symbol is FNV. TO.
It is the perfect business model for several reasons.
Let me show you what I mean…
The Anatomy of a Perfect Business
Not only did Pierre Lassonde make a ton of money, and make a lot of people rich. He also created what I believe is the perfect business model for the mining industry.
Here are the advantages of collecting royalties over typical mining, exploration, and production companies…
1) PAY ONCE—GET PAID FOR LIFE
You only have to buy a royalty once, then never have to spend another penny as you collect money throughout the life of a mine.
For example, Lassonde paid $2 million for 4% of the Goldstrike mine in Nevada. The first year the mine brought his company $505,304. And today they still get royalty revenues of $74 million a year… all from an initial $2 million dollar investment.
Lassonde also bought a royalty on a gold mine in California called Castle Mountain. His one-time investment was $2.8 million and he wound up making $8.4 million in royalties.
On a recent royalty on a Montana mine, Lassonde and his partners invested $36 million and made a quick $17 million from royalties. They believe the mine should be good for $12 million a year for the next 50 years… that’s a total of $600 million from a one-time investment of $36 million.
2) VIRTUALLY NO OVERHEAD
The problem with the mining business is that it’s EXTREMELY captital intensive. The entire process to build a mine and produce gold can take ten years or more and cost hundreds of millions if not billions of dollars.
Royalty companies, on the other hand, are a cash cow business because they have little overhead and require very few employees. In fact, Franco Nevada has only 21 full-time employees and it’s a $2.7 billion dollar company!
In contrast, look at how many employees most businesses need, to make half this amount of money. Rite Aid Pharmacies, for example, is a $1.4 billion dollar company. They have 53,669 employees!
3) NO PRODUCTION COSTS
Another great advantage of royalty companies is that they don’t have to worry about building and operating mines. Or financing huge pieces of equipment.
Consider Barrick Gold, for example, one of the largest gold mine operators in the world. Their profit margin is just 8.27% because of their incredible overhead. But a royalty company, like the one I’ll mention in a minute, can operate with just a handful of employees, and a single office, and enjoy profit margins of 53.3%.
4) INVESTMENT SAFETY
Another advantage of royalty companies is that they allow you to diversify your holdings, so your eggs are never in just one basket.
Pierre Lassonde’s Franco Nevada, for example, currently has more than 300 royalty interests all over the world. Should one mine stop producing it’s no big deal, because you still have 299 royalties that can bring in money. The point is, royalties from many operations are much, much safer than having to rely on just a handful of mines… where unexpected events can wipe out half of your investment.
5) INFLATION PROTECTION
Royalty companies don’t worry about inflation or increased costs.
You see, even if a mine operator has to start paying $10,000 more for its trucks this year, this cost hike does not affect a royalty company, because they continue to get their legally obligated royalties…no matter what.
In 2008, for example, gold mining production costs increased 24%, but none of these costs had an impact on royalty companies.
In fact, inflation can actually benefit a royalty company. When gold goes up 10% or 20%, the company’s revenue goes up 10% or 20%, but their costs don’t budge. And keep in mind, massive inflation may be on the horizon. It’s important to remember that in the inflation of the 1970’s, gold increased in value by more than 2,000%.
6) LIQUIDITY—EASY TO BUY AND SELL
As many Americans are finding out the hard way in the real estate business, liquidity is one of the absolute top requirements for any great investment.
Well, royalties are a lot easier to sell than mines or land. A royalty can typically be sold on very short notice. When the time comes to collect a profit… it takes only a day or two to get paid.
Simply put, owning a royalty is the least risky investment you can make in the mining business.
As my friend and legendry mineral investor Doug Casey recently said, “royalty companies are the least risky gold stocks… royalty companies buy a fixed percentage interest in a mine’s gross production and let the mining company do the dirty work. They’re conservative, and when gold takes off… profit margins of such companies will soar.”
The point of all this is… owning mining royalties are the perfect business because there’s little risk, low overhead, and huge profit margins.
As I mentioned, the first company to set up this type of operation was Pierre Lassonde’s Franco Nevada. The company was started in 1982, and early investors could have turned a $5,000 investment into $1.6 millon dollars.
Since Lassonde created this business model, however, several other companies have copied it, making a fortune for other savvy investors along the way…
The Royalty Company That Made 65% Last Year…
One of the most successful companies to follow in Lassonde’s footsteps is a firm called Royal Gold.
Royal Gold was started in 1986, and began as an oil and gas exploration company. In 1987 the company shifted its focus to gold royalties, and that’s when investors started to make big profits… a return of 3,295% for those who invested from the beginning.
Today, Royal Gold is the world’s leading precious metal royalty company, and owns a total of 118 royalties on several of the world’s most attractive gold mines.
In fact, they’re still making investors a fortune. Get this: While almost every stock in the world got crushed last year… Royal Gold returned a solid 65%.
Best of all, the mines in which the company owns royalties have reserves of approximately 64 million ounces of gold.
And with gold priced at well over $900 an ounce, that’s over $57 billion dollars in royalty interests the company will get a part of in the near future.
As my colleague Matt Badiali (who’s a geologist with 13 years of experience), says: “Royal Gold is not a mining company. It doesn’t have a fleet of geologists and engineers out scouring the hills. It’s a $1.4 billion accounting firm that takes its payments in gold.”
Again, it’s another example of how owning gold royalties could make you an absolute fortune in the precious metals business… with very little risk.
Royal Gold investors have made well over 3,000% on their investment since the company went public.
If you’re interested in purchasing Royal Gold, it’s listed on the NASDAQ and the stock symbol is RLGD.
The Problem… and a Great Way to Make 1,000%
Before you rush out and buy Royal Gold or Franco Nevada, there’s one thing you have to know…
Franco Nevada and Royal Gold are great companies, sure.
But they’ve been around for more than 20 years.
Yes, they still make investors decent money, but the days of 1,000% gains, I’m afraid, are probably long gone.
But here’s the good news: There is now another chance for you to make absolutely astonishing gains thanks to this incredible business model…
What very few investors know is that in 2003, a small group of investors with a ton of experience in the mining business got together.
They were led by a 28-year industry veteran… who has done all types of important work in this industry… from exploration geologist to mineral economist.
This savvy industry veteran helped form a new royalty company—just like Franco Nevada and Royal Gold. They now own royalties on mines in the U. S. Canada, Chile, Spain, Australia and South Africa, to name just a few.
And… they’ve done something else… which I believe could ultimately make them even more profitable than Franco Nevada or Royal Gold… You see, Franco Nevada and Royal Gold focus almost exclusively on gold mines. Yes, they diversified with various mines around the world, but they live and die based on the price of gold.
However, the company I want to tell you about decided to also diversify into even rarer precious metals… this way they would have even less risk, as precious metals prices fluctuate.
For example, this company owns royalty interests on gold, copper, cobalt, silver, uranium, and even diamond mines.
This company has six huge things going for it, which I believe will make it one of the safest and most profitable stocks in the world over the next few years…
Six Reasons You Could Retire Sooner
By investing in these companies, you get exposure to the world’s most promising gold, silver, diamond and natural resource mines – with more being added to the portfolios all the time.
1) THE BEST BUSINESS MODEL IN THE INDUSTRY
The royalty business model is a proven winner with little risk. Franco Nevada was able to turn every $5,000 invested into over $1.6 million. And while most stocks got slaughtered last year, Royal Gold returned investors 65%. The company I’m sharing with you now, was already up 129% within two years of going public.
2) 20 YEARS OF “WORRY-FREE” INGRESOS
The company I’m recommending you buy owns royalties on some of the most profitable mines in the world for the next 2o years. One of these nickel mines, located in Canada is expected to produce for another 25 years… until 2034.
When asked about the company’s policy of investing in mines with long and stable life spans, the CEO said this…
“Don’t bring me one of those three or four year gold deals and tell me its the best thing since sliced bread, because its not. I’m looking for deals that have 20-year lives or longer”. 3) THE PRECIOUS METALS BOOM
Over the last few years, precious metal prices have skyrocketed. And with the Federal Government flooding this country with trillions of dollars, prices will likely continue to increase thanks to inflation.
In fact, since 2003, gold has increased over 260%, copper has increased 207% and silver has increased 171%.
There is simply no better way to play this bull market over the next few years than owning super-safe mining royalties on the world’s most precious and valuable commodities.
4) FRUGAL MANAGEMENT
I want to own a business where the guy in charge is efficient, frugal, and saves profits for shareholders–not lavish corporate events or furnishings. That’s one of the reasons why I love this new Colorado royalty company.
During a recent annual review of expenses, for example, the CEO noticed that air travel costs had increased significantly. He decided to install video conferencing to save money on airfare and said, “Despite a high-margin business model, [the company] has not lost its cost discipline.”
And get this, despite being a $250 million dollar company, the firm has only 11 employees.
This new Colorado royalty company I’m recommending you buy is well diversified. They own 85 royalties on mines around the world, and the majority of these mines are in stable, developed countries such as the U. S. Canada, Australia, and Spain.
Also, they diversify among precious metals such as gold, copper, cobalt, silver, nickel, and uranium.
6) YOU ARE GETTING IN EARLY
This might be the most critical point about this investment.
This new Colorado royalty company has been around only since 2003. The share price is still well under $5. And the company is in the works of producing some incredible deals for shareholders over the next few years, including…
A copper and gold mine in Spain, for example, is expected to produce for the next 15 years, and a mine in Nebraska should produce for 20 years.
The point is, this company is already an incredible investment, and over the next few years, it is set to pay investors a fortune.
I believe you could invest today and watch your royalty gains pile up to extraordinary sums… for years and years to come.
And because I want you to get in early while there is still a chance to make massive gains on this new royalty company, I have written a Special Report called “One Investment That Can Pay for Your Retirement”.
I’d like to give you access to this report for FREE. It will show you how to buy this company… the ticker symbol… the price to pay… and why you can look forward to a decade or more of huge gains.
I’ll go into very detailed valuation, which shows you exactly why I believe this business is one of the few safe “buy-and-hold” stocks in the world today.
It’s an incredible value… with very little risk… which could pay you hundreds and hundreds of percent gains over the next few years.
Let me show you how to get your FREE copy today of my research…
The King of Royalty Companies
My name is Dan Ferris.
I’m the editor and analyst of Extreme Value, an investment advisory letter that focuses on the safest and cheapest stocks in the market—such as the royalty company I just mentioned to you.
My “Extreme Value” strategy offers what I believe is the single best way to make money in the stock market today… by using only the safest and most profitable investments.
Often times, I’ll spend up to six months researching a stock opportunity… because I won’t make a recommendation unless I find it almost impossible to lose money.
For example, a few years ago I flew to the island of Maui, rented a car, and toured 37,000 acres of sugarcane fields owned by a company called Alexander and Baldwin (symbol: ALEX). I was accompanied by John Moxie, the company’s Vice President of Farming Operations, who showed me each stage of the sugarcane growing process.
After the tour, I went to the Maui Real Property Assessment Division where I found 242 tax records filed under Alexander and Baldwin’s name. I discovered that the real assets owned by the company were selling on the stock market for a small fraction of what they were actually worth on the open market.
Specifically: The company owns 90,600 acres of Hawaiian land, most of it on the islands of Maui and Kauai. And almost all of it is carried on the company’s books at its original average cost of just $150 an acre. Today, some of that land is worth in excess of $1 million per acre…
That’s what I call an “Extreme Value” situación.
Of course I recommended this company to my readers who could have seen gains of 154%. I expect we’ll make considerably more over the next few years as well.
In short, I’ve spent the last several months doing the same type of in-depth research on this new mining royalty company, which I believe could single-handedly pay for your retirement in the next few years.
And the good news is… there are several other incredible “Extreme Value” opportunities out there right now…
How to Safely and Legally Get Paid Thousands of Dollars Thanks to The Tax Man
My research for Extreme Value focuses on finding extraordinary opportunities to make very large gains… with almost no risk.
Well, recently, I’ve found an incredible way to profit, thanks to the tax system.
In short, I’ve found an investment that is better than government bonds, municipal bonds, or just about any savings vehicle on the planet.
I expect you could get paid about 50%-100% on your money over the next few years… with as little risk as is possible in the investment world.
It’s all thanks to something I call “Tax Revenue Shares,” which could potentially pay you a small fortune on about 16% of the tax revenue paid in the U. S.
Some investors have been taking advantage of these “tax revenue shares” for years and have already seen gains as high as 923%.
Even Warren Buffet, the greatest investor of the past 50 years has held this investment, and at one time owned more than $10 million worth.
We all know that the only things certain in life are death and taxes. But most investors don’t have a clue about how to turn the tax system in their favor.
Keep in mind: The payouts from the “tax revenue shares” I’m going to tell you about have increased in value 23 of the past 27 years.
Don’t get me wrong: These “tax revenue shares” will not pay you 500% in one year.
Rather, they are a super-safe investment, perfect for your savings, which could pay you a heck of a lot more than any bond or savings account I know of. Remember, no matter what happens in the economy or the stock market, people have to pay their taxes. And this is how you can get your share.
And I haven’t even told you the best part: You can easily buy these “tax revenue shares” through any ordinary stock broker, or on-line brokerage account. It couldn’t be easier.
I’ve written a report covering everything you need to know about these “revenue shares” called, How to Make Safe 50% Gains From “Tax Revenue Shares.”
Again, I’d like to send you this Research Report immediately, and free of charge.
The research on “tax revenue shares” and the incredible opportunity in the new mining royalty company are actually the first things I’ll send you when you take a risk-free look at my monthly advisory letter, Extreme Value.
This research will help you decide whether or not Extreme Value is right for you.
Here’s what I mean…
Please Be Advised: Extreme Value is not for the average reader.
That’s because my strategy is designed for a small group of readers who are interested in little-known companies often involved in very safe businesses… which still have the potential for very large gains.
In many cases, this could mean getting into a company your broker may not know about… with little-to-no coverage on Wall Street… and then leaving it alone for months at a time.
The investments I follow I usually recommend holding for the long-term… and often get staggering returns as a result. THIS IS IMPORTANT: If you want to take chances day-trading or buying options, or anything like that, my work is definitely not for you.
In short, my goal is to find investments where you can get in at such a low price, with such a margin of safety, that you have the potential to double or triple your money—with little risk involved.
And what’s funny is, even though we focus on very safe “Extreme Value” situations… I don’t know of another research service in the industry that has come anywhere near producing the big gains we’ve found over the past few years.
For example, do you know of any research or speculative service that has shown readers potential gains as high as…
221% on Consolidated Tomoka—real estate and golf operations
53% on Alico—land management
165% on St. Joe—real estate development company in Florida
35% on Korea Electric Power—electric utility company
124% on Gateway—computers
97% on Circuit City—electronics
113% on Tejon Ranch—agriculture and real estate development (By the way, this is a fantastic “buy” again, and I’ve recently recommended that my paid subscribers purchase this stock. It’s listed on the New York Stock Exchange and the ticker symbol is TRC.)
94% on JAKKS Pacific—developer and producer of toys And keep in mind: We found these huge gains while focusing on the safest “Extreme Values” en el mercado.
The point is, most people think you need to trade in and out of risky investments to make big gains.
I think what we’ve proven is that you simply have to do more homework than anyone else… and you have to get into great companies that are trading EXTREMELY cheap… so that you all but eliminate any undue risk.
This is how I operate and why I spend up to 6 months researching a single stock recommendation—so that you can see the kinds of gains I described above.
Of course, what I love most about my work is getting letters like these from subscribers…
“Dan, my results have been as follows: Made $1.01 million in profits, before taxes and expenses.”
Josh Winters, Thornton, CO “I made my first purchase from your recommendations nearly three years ago and have realized a 554% gain on that investment alone. Other big winners for me have been 129%, 100%, and 90%… Keep up the good work!”
Rich Charles, Tacoma, WA
“About $20,000 ahead in just 60 days! Needless to say, these returns have sure beat the recent “market” by a country mile. Extreme Value delivers what it promises! Tell Dan Ferris, I figure that his advice is worth a lot more than the cost of his subscription.”
Hank Dickson, Colby, KS
“During the past year, I have probably achieved gains of about $250,000 on Extreme Value recommendations. As a group, these investments have doubled during that time period.”
Wesley Calleran, Muskegon, Michigan
“I’m very pleased with the results of the Extreme Value portfolio and the amount of research that goes into each recommendation… [it] produced an income exceeding $150,000 per year.”
Curt Randall, New Haven, Connecticut
One more thing I should tell you too…
If you decide to take a look at my work, you will be in good company.
What I mean by that is, not only do every-day readers follow my recommendations for big gains, but so do many professional investment managers… Such as Mohnish Parai, a very wealthy money manager and New York Times best-selling author (who was also featured in Forbes for out-performing Warren Buffet for 4 straight years). He said, “I read Extreme Value every month. It’s one of the best value-oriented advisories I receive.” And Grover Kowalski from Los Angeles, CA, who said, “I am a 37 year retired professional from the investment business that involved bonds, stocks, options, annuities, and life insurance… All I can say is this… we should have had you at the head of our investment department.” If you’d like to give Extreme Value a try, I believe very strongly that you will not be disappointed. I think you could safely make more money with my work than you’ve ever made following any other financial advice from any source.
Here’s how it works…
On the second Friday of every month, I’ll send you a full report (by email and then by regular mail) on extreme-valued investments… the safest and most profitable opportunities in the entire market. Our goal is to make at least 100% gains with each investment. Sometimes it takes just a few weeks for the values to be fully realized… sometimes it can take a year or more.
In short, wherever the best opportunities are, I will find them… so you can get there first and potentially see very safe and large gains.
But before you decide if you would like to try Extreme Value, there is something else I want you to have…
It’s an amazing opportunity I think you’ll find very valuable…
The Finest Beachfront Property in The U. S. For $1,500 An Acre
What if I told you that, thanks to the real estate collapse, you could now own some of the nicest beaches in all of America… for the equivalent of one hundred dollars per acre…
¿Estarías interesado?
Well, I’ve done an incredible amount of research on this opportunity, and I can tell you that this opportunity is very real—and there is nothing else like it in America.
Even better, you can make this real estate investment in the stock market, so it’s super-simple and cheap to buy and sell.
You see, very few investors know it, but there’s a one-of-a-kind stock in this country that does nothing but hold some of the worlds most valuable land… stretches of prime beachfront, in some of the most popular destinations on Earth.
What’s incredible is that due to the real estate meltdown you now have the opportunity to buy this beachfront land at truly distressed prices… 57% less than it was fetching a few years ago.
Look… I’m not one who looks specifically to capitalize on others misfortune… but these prices are far too good to pass up. This is absolutely the real estate buy of a lifetime.
Your kids and grandkids could look back at this investment as the smartest one you ever made.
Yes, there are some other incredible deals in the real estate markets right now… but for most of them, you have to deal with bankers, distressed properties, foreclosures, etc.
Well, this beachfront investment I want to tell you about is safer, easier, and probably more lucrative than anything else you can find on the real estate front today.
That’s why Michael Winer, who might be the best real estate value investor in America (he runs the Third Avenue Real Estate Fund) recently said: “For us, [this company] boils down to some 800,000 acres of spectacular real estate that is ripe for generations of development.”
The point is, this is a way to get in on America’s best real estate, at dirt-cheap prices. I think you could safely double you money over the next few years… And probably make many, many times that over the next decade and beyond.
You most likely won’t have an opportunity to own beachfront land at these prices again in your lifetime… so if you think people will continue to want beachfront land… this is one of the best investments in the world.
I recently finished writing a new Research Report about this ridiculously low-priced beachfront land, called “The World’s Most Desirable Beachfront Land for $1,500 An Acre.”
You can have access to this report-free of charge-within the next 15 minutes.
How to Get Your Risk-Free Preview
Normally, we charge $1,000 per year for my monthly research.
No, it’s not cheap, but I believe that’s an absolute bargain.
No one… and I mean no one on or off Wall Street, does the type of in-depth research I do to find a single good investment.
That’s why some of the wealthiest and most respected people in finance read Extreme Value.
If you were to put your money with one of these professional managers, you would easily pay two, three, four – or more – times as much as I charge… and frankly, the advice wouldn’t be half as good.
And here’s the best part of all: For a limited time only, I would like to give you the chance to try out my research at a much lower price… with zero risk to you.
It’s an amazing opportunity I think you’ll find very valuable…
Today, I would like to offer you a 50% off, no-risk preview of Extreme Value for just $500.
By taking me up on this offer, you are agreeing only to TRY my work to see if you like it. If not, no problem… we will part ways as friends.
In short: Start a trial subscription today, and you’ll have 90 DAYS to decide whether my research is right for you.
If for whatever reason you want to cancel your subscription in the first ninety days, just call our toll-free number and let us know and you’ll get a 100% refund. No questions asked, no hassles.
As soon as you let me know if you want to take a risk-free look, you’ll have access to:
12 monthly issues (1 full year) of Extreme Value. On the second Friday of every month, I will send you a full report (by email and regular mail) on what I believe is the best “value” investment in the market so you can act right away.
Research Report #1: One Investment That Can Pay For Your Retirement. Shows you how to see massive gains over the next few months on the new royalty company that could potentially turn every $5,000 invested into $1.6 million.
Research Report #2: How to Make Safe 50% Gains From “Tax Revenue Shares”. The opportunity to get paid a small fortune on about 16% of the tax revenue paid in the U. S. Even Warren Buffet owned $10 million dollars worth of these safe investments at one time.
Research Report #3: The World’s Most Desirable Beachfront Land for $1,500 An Acre. Prime beachfront property in one of the most popular destinations in America. You could buy this pristine land today and potentially double your money over the next few years.
Every Extreme Value issue ever published (going back to 2002)
Extreme Value website access. You will have 24-hour access to the complete archive of Extreme Value Monthly Issues, Special Reports and E-mail Updates.. If all you do is simply read one of these reports and follow just one recommendation—your subscription could easily pay for itself many times over… with very little risk.
To get started, and to get instant access to all of the investment research I described in this letter, click here.
Dan Ferris Editor, Extreme Value August, 2009
PD Remember – we’re making this special 50% off preview price available to you for a limited time. If you’ve ever wanted to try Extreme Value, there has never been a better time than now. See the order form on the next page for our No-Risk money back guarantee.
If you read my article from late last week, you know about my family farm in Kansas. And you’ll also remember that I work out of the StreetAuthority offices in Austin, Texas.
So what do those two places have to do with today’s investment idea? One word: Water.
Allow me to explain. Being from a farm (and living in Tornado Alley), I started keeping an eye on the weather at an early age. Rain — or lack thereof — can make a big difference on the bottom line.
Meanwhile, I now live in Austin. For those of you who didn’t realize, 2008-2009 proved to be some of the most drought-stricken years in central Texas since the 1950’s. Take a look at the drought map for the state from August 2009. It doesn’t take a map legend to realize that the dark reds mean a nasty drought.
Luckily, the rains in Texas have returned and just in time — the reservoirs that provide the region with drinking water were sitting at less than 50% full just a few months ago.
Now, it seems strange to have to worry about water — anywhere in the world — when you consider that the planet is covered in the stuff. But 97% of Earth’s water is laden with salt. Two percent is locked up in snow and ice. That leaves just 1% for humanity to use. And in total, nearly 2 billion humans lack adequate supplies of fresh water.
But it’s not all bad news. There is a way out of the problem.
The answer is the desalinization of seawater. The long-term growth in the field is real and should only accelerate as global population increases. I hope the investor in you is already smelling an opportunity.
In fact, I’ve found a $4-per-share company that has a patent on something every desalinization plant needs. Simply click play on the audio chat below to find out the details behind this company, including its name and ticker symbol. (Don’t forget to make sure your speakers are on, so you can hear.)
I have high hopes for this stock… so much so that I’ve tabbed it as one of my four “game-changers” for my recent free webcast on potential high-growth companies. If you missed the original webcast last week, don’t worry. There’s still time to view this presentation. Simply follow this link to view the webcast in its entirety for free
I doubt you’ve ever heard of Rockhopper Exploration.
Rockhopper is a small U. K.-based oil company. But what’s unique about its business is that the company is a major player in the drilling around the Falkland Islands.
You likely remember the Falkland Islands as the centerpiece of the Falklands War between Argentina and Britain back in the ’80s. In that conflict, the British exerted their control over the islands, but not before about 1,000 soldiers lost their lives. A few months ago, a new chapter in the story was written.
Several small British companies (including Rockhopper) exploring in the waters north of the Falklands said they found oil. Early estimates suggest the site contains 3.5 billion barrels.
In response, the Argentine government began to block some ships from bringing in drilling equipment while denying that the British have any right to drill for oil around the islands. Now why would Argentina (along with some tough words from Venezuela’s Hugo Chavez) begin ruffling feathers over oil exploration in the Falkland Islands?
The only reason is because this opportunity is going to change the game for the economics of the region and the companies involved. In fact, I had a stake in shares of Rockhopper. And after favorable test results from its wells, I was able to close the shares out for a nearly +300% gain, even though it was a pretty bad time in the market.
That’s what can happen when you invest in what I like to call “game-changers.” These are companies with futures so strong and prospects so bright that their stocks seem like they can only move in one direction: up.
Of course, Rockhoppper isn’t the only game-changing stock out there. I think the opportunities are so great, I put together a short audio chat that offers details on several of the opportunities I’ve found (including a little more on Rockhopper). Simply click play below to watch. (Please make sure your computer speakers are turned on and that your volume is high enough for you to hear the audio.)
I, years ago was a member of several Montly Fools Nes letters and investment clubs, if wich, I took a bath. One such, was The Montly Fool Millionair Investment, or such such name. I took a blood bath in that and other Montly Fool offerings. Do your own homework and don’t believe everything you read. Sincerely KJF
I’m amazed, I must say. Seldom do I come across a blog that’s both equally educative and engaging, and without a doubt, you’ve hit the nail on the head. The issue is an issue that too few folks are speaking intelligently about. I’m very happy I found this during my search for something regarding this.
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Falco Announces Granting of Stock Options
MONTRÉAL, QC --(Marketwired - March 11, 2016) - Falco Resources Ltd. ("Falco" or the "Company") (TSX VENTURE: FPC ) announces that the Board of Directors approved the grant of incentive stock options to directors to purchase up to an aggregate of 718,028 common shares in the capital stock of the Company. Grants to officers are subject to a three-year vesting period and a five-year term and grants to directors are subject to a two-year vesting period and a three-year term, all at an exercise price of $0.46 per share.
Falco Resources Ltd. is one of the largest mineral claim holders in the Province of Québec, with extensive land holdings in the Abitibi Greenstone Belt. Falco owns 74,000 hectares of land in the Rouyn-Noranda mining camp, which represents 70% of the entire camp and includes 13 former gold and base metal mine sites. Falco's principal property is the Horne Mine, which was operated by Noranda from 1927 to 1976 and produced 11.6 million ounces of gold and 2.5 billion pounds of copper. A updated 43-101 mineral resource estimate for the Horne 5 deposit delineated an Indicated Resource of 5,361,000 gold equivalent ounces ("oz AuEq"), including 3,418,232 oz Au hosted in 58.3 million tonnes averaging 2.86 g/t AuEq (1.82 g/t Au; 15.60 g/t Ag; 0.20% Cu; 1.00% Zn) and an Inferred Resource of 1,254,000 oz AuEq, including 854,534 oz Au hosted in 12.7 million tonnes averaging 3.08 g/t AuEq (2.10 g/t Au; 26.26 g/t Ag; 0.22% Cu; 0.57% Zn.) -- see January 25th, 2016 press release for details.
Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this press release.
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Television 2.0 — “The $2.2 Trillion War for your Living Room Begins Now”
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The folks at the Motley Fool have pitched a lot of “big change” stock ideas over the years, from the “end of ‘Made in China'” (3D printing) to the “Death of Microsoft” (cloud computing), and these email campaigns always get a lot of attention from Gumshoe readers … both because they’re well pitched and because the big trends they describe often do, at least in broad terms, seem well-grounded in reality.
So it caught our attention when the floodgates opened over the weekend and thousands of readers (OK, dozens — but still) wrote in asking about the latest pitch from them, called “Television 2.0″. It’s a long ad, as they always are, and it’s signed by one of the tech folks at the Fool because he tells a personal story about taking his daughter to school and having her throw the epiphany in his face that yes, teenagers don’t need traditional cable TV anymore … but it’s really an ad for Tom and Dave Gardner’s Stock Advisor newsletter, the flagship publication of the Motley Fool, and it’s about how content creators will be the winners of the “war for your living room.”
Here are a few excerpts from the ad about the big picture — which is basically just that more people are getting their video in untraditional ways and video and cable providers are losing leverage:
“Because the percentage of households with a cable or satellite subscription is now declining for the first time in the history of television.
“3 million Americans have already cut the cord, including 425,000 in the past 3 months alone.
“And according to Credit Suisse analyst Stefan Anninger, those ‘cord-cutters’ are joined by a new group … the “cord-nevers.” A full 83.1% of new households are choosing to live without pay-TV.
“No wonder Business Insider reports that the cable/satellite industry is ‘starting to collapse’…”
And this about “how we got here,” including comparisons to old monopoly businesses like the music labels, phone company, etc….
“We started paying more and more good money to get less and less good programming.
“And we put up with it for too long.
“I mean, millions of Americans dropped newspapers, long-distance telephone service, bookstores, traditional stockbrokers, record companies, travel agents, and department stores, even though they were actually quite happy with those businesses.
“It’s just that something better came along.
“But here we are still clinging to this outmoded television delivery technology that we’re all really unhappy with.
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“And now that something better has come along for this too, it’s time to act.
“Not just as consumers, but also as investors.”
And then he preemptively covers that concern that’s probably popping up in your head right now: In most cases, the fastest internet service you can get is from … your cable company (or another hated monopolist with bad customer service, your local phone company), and won’t they find a way to shut down those pipes if you stop paying for the content they sell through their cable box?
“… another big problem had occurred to me.
“Even if I quit cable, won’t I still be paying those same #$!&(&*$ for my internet service?
“You can use your imagination to figure out the actual word I said.
“But it turns out that Tom has been researching this same puzzle for months. And he’s already found the solution….
“Google Fiber. And it could be just as revolutionary as Google’s search engine was when it debuted…
“Making our internet connections 100 times faster (fast enough to watch TV and record 8 other “streaming” shows in high-definition all at once, with no herky jerky download delays). And all for the same price most of us pay our cable companies for internet right now.
“In other words, it will completely break down the wall between television and the Internet. And put the cable companies out to pasture.
“CNN Money is calling Google Fiber an ‘audacious bet.’
“But Tom says it just makes sense. (And he should know…he recommended Google in Stock Advisor on July 20 when he found out about the Fiber project, and has already made a 18% gain.)”
What is Google Fiber, as we go off on this tangent? It’s Google’s effort to push for better data service by buying up unused fiber optic cable and offering up a test bundle of tv/data/phone at a set price — it’s very much a test, here’s how the ad describes it:
“… other companies … tried to build a fiber-optic information superhighway over the years (including the cable companies) [and] left a lot of unused wiring. It’s called ‘dark fiber,’ and Google is quietly buying it for pennies on the dollar.
“Meanwhile, they’re plotting their next move — now that Google Fiber reaches more than 90% of Kansas City, they’re cutting deals with ESPN, CNN, TBS, Cartoon Network, plus (you guessed it) the NFL Network. And placing help-wanted ads for national sales representatives on their company website.
“Which is leading some technology watchers to conclude that the Google Fiber experiment in Kansas City ‘is not a test’ but rather ‘a takeover plan.'”
It’s hard for me to imagine Google pouring trillions of dollars into wiring the entire country, my assumption would be that this is all part of an attempt to push other people (the telcos and cable companies, mostly) to improve connection speeds by giving them a little frightening taste of competition, but that’s just my guess. Right now it doesn’t cost Google that much because it is literally only available in a few “fiberhoods” of two cities, and those two cities are Kansas City, Missouri and Kansas City, Kansas. Still, I must admit that if they had this service available in my town I’d be tempted to jump on it — resentment of incumbent providers runs high, though unfortunately it’s pretty much in inner cities where there’s enough population density and “dark fiber” to make new startup services feasible on the cheap.
More from the ad:
“I was starting to think that Google would be my big winning investment in ‘Television 2.0.’
“But David’s research has now convinced me otherwise….
“You see, Google Fiber isn’t the biggest immediate threat to the cable companies. Because it might take a few years to complete its nationwide roll-out.
“What would really make me sweat if I was the CEO of Comcast, Time Warner, or DirecTV, is a tiny detail buried on page 555 of Steve Jobs, the best-selling official biography of the Apple CEO written by Walter Isaacson.
“(David’s been watching Apple closely for years — he pointed Stock Advisor members to the company in 2008, right when the iPhone was gathering steam. And they’ve made a fantastic 336.9% return on that investment already.)
“This is the key quotation, from Steve Jobs himself:
‘I’d like to create an integrated television set that is completely easy to use. It will have the simplest user interface you could imagine. I finally cracked it.’
“So while some say Apple’s announcement next month will introduce a smaller version of the iPad… the truth is, Apple needs a bigger splash than that to justify the sky-high stock price that comes with being the most valuable company in the history of the world.
“That’s why Barron’s calls the announcement ‘an event well worth watching.’
“Why Computer World thinks that Apple is preparing a ‘sneak attack’ on the TV market. And why The Atlantic says ‘Apple wants to be in your living room. And it doesn’t want to settle for being the screen in your lap while you watch TV. Apple wants to be the TV.’
“It’s also why you may need to act NOW if you want to position yourself for maximum profit in the ‘holy war’ for control of television that will be waged in 2013 and 2014.”
Which, as you read through, might make you think he’s recommending Apple again — but that’s not the case either. He lays out the competitive landscape for TV viewership:
“There’s the cable and satellite companies clawing to hold onto their trillion dollar revenue stream.
“Meanwhile, there’s Google attacking through its fiber optic wires underneath the street.
“And now Apple opening a new battlefield in the living room.
“Not to mention other industry heavyweights that already offer popular ‘Television 2.0′ services with a far greater toe-hold than Google Fiber or Apple TV.
“Like Amazon, which has more than 10 million video on-demand subscribers in its Prime service.
“Or Netflix, which has more than 27 million subscribers watching movies and TV shows through its interface.”
And then gets to his “content is king” realization:
“David and Tom sorted it all out for me with something they called ‘The Cheerios Test.’
“And sent me running to my online brokerage…NOT to buy Google, or Apple, or Amazon, or Netflix…but to buy two stocks I had never heard of before, and a third one I would have never even considered…
“You see, with the brilliant strategy they gave me, it doesn’t matter which corporate giant gains a decisive advantage in this war…or when.
“Because as long as you know how to invest in these 3 stocks, you’re in good position for any outcome.”
So what the heck is the “Cheerios Test?” Here’s what he says on that:
“I love Cheerios. (Better than Raisin Bran or Froot Loops.) I eat Cheerios. (Every morning!) But I don’t really care that much about who I buy them from or what kind of package they come in; I just care about convenience and price.
“That’s when it hit me.
“They were saying that TV was basically the same.
“What we really love are TV shows. ¿Derecha?
“My daughter likes Glee. My son likes Family Guy. My wife likes Top Chef. And I like football.
“It doesn’t really matter what screen we watch them on, or what time of day…or what network, cable company, satellite dish, website, app, or gadget delivers them to us.
“Our shows are our shows!
“A recent Forbes magazine article agrees. It starts with an alarming headline: ‘The Death of Television’!
“But it goes on to explain that rather than dying, TV is about to be reborn.
“And in the world of TV 2.0, we’re in control.”
So yes, it’s about who owns TV shows and can get them to you. This has been a matter for investor debate for many years, and you’ve probably heard the “content is king” argument before, though it’s held a bit stronger for video content than it has for newspapers, magazines and songs so far.
They give a rundown of some of the major content showdowns between content owners and distributors in recent years, many of which have led to better payouts for content owners:
“Like the AMC channel (home of Breaking Bad and Mad Men) staring down the Dish satellite network.
Fox playing chicken with Cablevision and almost blacking out a 2010 World Series game.
Viacom (which makes The Daily Show, Jersey Shore, and Spongebob Squarepants) strong-arming DirecTV.
The Starz movie network pulling out of Netflix.
And the Madison Square Garden channel taking its New York Knicks games away from Time Warner cable during the height of “Linsanity” this spring.”
And there are plenty of other examples — this is a flip from where things where 10 or 20 years ago, when upstarts like ESPN or Fox News were paying cable companies or providing free or very cheap content just to get distribution. Now that content is often what drives cable and satellite subscribers to renew, so the fees content providers are charging are climbing dramatically, and cable companies are chafing… but the loss of the cable monopoly is hurting them, since so much of this content can also be accessed online and the providers of genuine hits have leverage both to get better deals for those hit shows and networks, and to force more “bundling” of their weaker offerings that are trying to gain traction.
So that’s a long bit of chatter to get through as we finally start to get some hints about which companies they’re picking:
“Why you need these 3 stocks NOW
“We’ve seen that on-demand direct distribution to the customer changes everything.
“Just like it did for online airplane and hotel bookings with Priceline. com, and online purchases of books (and just about anything else) on Amazon. com….
“Which gives content providers the upper hand — regardless of whether they’re going through traditional carriers like Cablevision or Time Warner, or new challengers like Google, Apple, and Netflix….
“Tom and David think these three winners are about to go on the kind of epic run we only see once every 10 years or so.
“And it’s hard to disagree. Because as you’ve seen in this report so far, the next revolution in television has only just begun.
“Once more people find out about Google Fiber and the new Apple TV set over the coming days and weeks…the war for the living room will be what everyone’s talking about.
“And that means even the Wall Street skeptics will finally come around…
“Which gives you a short buying window. Fortunately, there’s still time to join those Stock Advisor members and cash in — but you may need to act NOW.
“I wish I could tell you the name and ticker symbol of these 3 uniquely positioned stocks. And if it were up to me I’d probably just spill the beans.
“But my friends in the Motley Fool customer service department tell me I can’t, out of respect to the members who are already paying for our Stock Advisor service.”
Which is where your friendly neighborhood Stock Gumshoe jumps in, of course — I can’t give you their full report on these stocks or tell you exactly what advice they might be giving, but I can at least sniff through their clues and tell you the stocks and the tickers and give a little basic info so you can go forth and researchify on your own.
So let’s get to it, shall we? First!
“Company A is an $89 billion powerhouse that owns more than 100 global television networks, plus 7 movie studios, 4 video game companies, and hundreds of websites. Not to mention a little-known research laboratory that’s developing the next generation of TV technology. (Like a new system that lets you use any object in your house — including your couch, your coffee table, even a glass of water — as a remote control). In fact, this company’s growth potential is so strong that legendary hedge fund investor George Soros just snapped up a million shares.”
Well, probably no surprise to you there but this one is clearly Disney (DIS) — and yes, you probably also know that it’s an entertainment and content powerhouse as well as a travel and technology company, owning huge content-spewing brands like ABC and ESPN as well as the eponymous studios and cable networks and relatively recent acquisitions Marvel and Pixar, among many others. They’ve gotten so big now that it’s hard to pick just one “crown jewel” from their assets, but ESPN has probably been the single most powerful content provider in the cable/content wars, with what seems like almost unlimited power to raise per-subscriber fees — after all, ESPN gets both huge live viewership (sports is watched live, mostly) and a strong “young guys” demographic that brings in huge advertising dollars from the film studios and beer and car companies (among others).
And yes, it’s hard to argue with an investment in Disney — it’s got a fortress balance sheet, it’s a blue chip company that’s incredibly profitable, it has become a dividend growth company over the past decade, and it’s reasonably priced even after the stock has gone up about 50% in the past year. I guess the only real argument against building a position in Disney at times like these is that it’s also a tourism driven and hit-driven company, so there have tended to be opportunities to buy the stock cheaper in years when theme park visitors are down, or when they have a big flop year with their movies — though it can be hard to nimbly watch and take advantage of those things. The John Carter film was a huge flop for Disney relative to expectations over the winter, but even the announcement that they would book a $200 million loss on the film in the Spring failed to keep the stock down for very long, largely because that news came right around the time they announced that mega-hit The Avengers made over $200 million in ticket sales on its opening weekend.
I’m sure no one will get fired for recommending Disney, but this is one that, were I to buy it as a long-term hold, I’d probably nibble now but try to scale into it over a couple years and hope for a couple bad tourist seasons or a lousy Christmas movie slate to bring dips in the stock. I did own Marvel Entertainment years ago, which was a hugely successful recommendation of David Gardner’s back when they were on the verge of bankruptcy and the first Spider Man movie had yet to be released (and years before Iron Man and The Avengers made the Marvel stable of characters look like such a no-brainer goldmine, but I don’t think I’ve ever owned Disney.
Still, if you feel like there will be a full-fledged “war for your living room” with several companies vying to provide live TV, it’s hard to picture a company having more leverage in this than Disney, since they bring with them ESPN, ABC and their own Disney Studios content, and there isn’t a single cable provider in the country that could sell their service effectively if they cut ESPN. That leverage might not impact a $90 billion company that much on an earnings per share basis, particularly as this “war for your living room” will likely be waged over many years and through many test locations, but it’s still leverage.
Oh, and yes, they do have a research division that came up with a crazy cool technology that could turn your houseplant (or other stuff, I guess) into a remote control — there’s a story on that here if you’re curious. It’s not going to be financially significant in the next few years, I would bet, but it is cool.
“Company B rose from the ashes of a declining newspaper empire. Now it’s cultivating a niche TV audience that’s especially attractive to advertisers. Allowing this company to generate more than $2 billion in revenue from just 1.7 million viewers…At $1,290 ‘revenue per viewer,’ that makes its programming 76% more profitable than the average television network.
“According to Investor’s Business Daily, even though the entertainment industry is extremely lucrative, it actually has ‘a puny number of high quality stocks.’ And those are two of them.”
This one is a company I don’t know well at all, other than being quite familiar with the fact that they’re responsible for the celebrification of the interior design, real estate brokerage, and cooking industries — this is Scripps Networks Interactive (SNI), which owns the Food Network, HGTV, the Travel Channel, etc. Scripps did indeed start as a newspaper company, and was one of the dominant newspaper publishers in the world for the second half of the 20th Century (you know, back when newspapers made money), as well as a major local media company through a network of local TV stations and cable companies, but about 20 years ago they started spitting some of that prodigious newspaper cash flow into content creation, building and buying those now-well-known niche cable brands, starting with HGTV. Four years ago they split the company, so the original E. W. Scripps (SSP) still owns the 20 or so TV stations (mostly ABC affiliates, coincidentally) and 13 mid-market newspapers around the country and is a stagnant, barely profitable $600 million company, and Scripps Networks Interactive owns the five cable channels and is a rapidly growing, highly profitable $10 billion entertainment force. Or farce, if you’re feeling cynical about our desperate desire to watch other people saute onions and declutter their mud rooms.
You can certainly argue that Food Network and HGTV are strong enough, with loyal enough viewers, that they should command premium and growing fees from cable and satellite providers — if you’d asked me, I would have thought that this celebrity chef fascination was a flash in the pan when Emeril Lagasse was the standard-bearer five years ago, but even though he has moved on there are still dozens of stars being made like Guy Fieri and Paula Deen (who are, in turn, turning themselves into chain restaurant brands). So I’m the last person to suggest that I can tell where this trend goes, but these cable networks seem to have a pretty good thing going — they have low-cost content, they build celebrities who must, I presume, work cheap as they build their personal brands, and when those fizzle or the stars demand more (a la Emeril, I suspect), they move on and build the next star. It looks like it’s be working pretty well — they did quickly end disputes with AT&T and Cablevision when they were briefly shut out of those networks for a few days during contract renewal talks a year or two ago, and I presume that it was pressure from subscribers that led to those resolutions, so this does seem to be a content provider that has a fair amount of leverage over the distributors — and, of course, a solid web presence.
I’ve never looked closely at SNI, but I did skim through the last quarterly report and note that while they are growing revenue pretty nicely, they’re expecting to grow expenses more quickly this year — I don’t know if that’s a sustained trend, but it’s an indication that their programming costs might rise faster than their advertising revenue and subscriber fees, which obviously would be a huge weight for the business to carry since they’re already carrying a premium valuation (about 20X trailing earnings). That could well be a temporary thing, I don’t know, but it’s something to keep an eye on — we’re certainly moving into an era of more distributed programming, with more online video … but my impression is that advertisers still tend to pay substantially more for targeted, timely mass attention through hit shows than they do for online advertisements, so that transition is closely watched by both advertisers and content owners. There’s also a competitive aspect to this space, since HGTV and Food Network have to maintain their brand positioning against plenty of other niche cable channels as well as against upstart online brands in their space, but they are clearly a leader in that competition now so they do have at least some advantage.
“Company C didn’t make IBD’s list…because it isn’t really an entertainment company. In fact, even though it operates some of the most popular channels on TV (reaching more than 1.5 billion viewers in 180 countries), its business model is completely different. Its most important customers are actually elementary and high schools. And now it’s entering another $25 billion education market with a breakthrough product that’s half of the price of the traditional choice. So you can see why this company has been able to grow its quarterly earnings per share by a fantastic 22.5% in the past year.”
Well, I don’t know if I agree with that summary of the company — but we fed it through the Thinkolator and this is pretty clearly Discovery Communications (DISCA and others, more on that in a moment), the other big cable network company that gets a fair amount of investor attention. Like SNI, they enjoy the benefits of all of the original “reality” shows — low production costs and niche marketability. They call themselves “The World’s #1 Nonfiction Media Company” and produce a bewildering array of programming for their popular channels, including Animal Planet, Discovery Channel, TLC, The Oprah Network, etc. And they are taking advantage of international distribution in a big way, partly because their documentary, reality and educational content is very easy and inexpensive (compared to fiction, at least) to translate to different languages and cultures.
But I don’t know that I agree that schools are its most important customers — or that their “breakthrough” will really turn out to be such in the “another $25 billion market.” They do have a strong educational offering, with streaming content that’s available in about half the schools in this country (replacing the beloved filmstrips of my youth on those days when the teacher has a migraine, he says cynically), and they are moving into “interactive textbooks” in an attempt to help shake up the $25 billion textbook industry, but when it comes to financial performance it’s all about subscriber fees for their networks from cable companies, and advertising revenue. In the US, they’re close to 50/50 ads and subscriber fees, and internationally subscriber fees are a stronger revenue generator at the moment — “education” is a rounding error when it comes to revenues and earnings at Discovery, though it’s certainly possible that they use that division to drive earnings or cover expenses in some other way. Their textbook initiative, called “techbook,” is yet another way for them to leverage their content into the education sphere — using the educational content they already produce to build interactive textbooks for schools, but I wouldn’t put too much weight on that. Education is a small part of Discovery’s income statement, and it’s not as though folks like McGraw-Hill or Pearson, dominant textbook publishers, have failed to notice that there are opportunities in technology-enhanced publishing for students… it may end up working well for Discovery, but I can’t see it being a major part of the business in the next five years, my guess is that in 2018 we’ll still care more about Bigfoot, River Monsters and custom choppers than we do about Discovery’s “techbook” negocio.
Discovery is also one of those multiple-class stocks — DISCA is the A shares, which get one vote per share, DISCB, B shares, gets 10 votes per share, and DISCK, C shares, gets no voting power. DISCK trades at a bit of a discount since it doesn’t get the voting power, which might be interesting for small investors who understand that they don’t get any corporate voting power anyway, though you can imagine a proxy fight or activist investor situation when voting shares should trade at a substantial premium, too, so those things are always a tough call — and really, though I hold shares in companies that have “lower class” non-voting or fewer-votes shares (like Berkshire Hathaway and Google), I don’t like to encourage that activity. The B shares are very illiquid, but currently priced about the same as the A shares.
Discovery is extremely profitable and growing nicely — their growth in the last quarter was not as strong as SNI’s, but they’re more than twice as big and have profit margins that are a bit stronger, and they are really the leaders when it comes to leveraging content internationally and across platforms, which helps to significantly increase profitability when they get their content right. I have more confidence in Discovery than I do in Scripps, though that may just be because they have a broader array of channels and hits and niches they can play to beyond Scripps’ core niches of travel, cooking, and home improvement… or it could just be a reflexive response to the fact that Vanilla Ice hosts a real estate show for Scripps on their DIY network, and I have a hard time believing in a world where that’s possible.
This is clearly an interesting time of transition for television and video entertainment — I don’t know if we’ll end up “giving up” on cable TV en masse in a surprisingly fast transition as happened with CD players and is happening a bit more slowly with printed newspapers, but there is a move to more online and streaming content and there are plenty of companies who are working to further that transition with hardware, software, and streaming libraries, including Netflix and Google and Apple and Amazon and hundreds of smaller players, but it’s also quite possible that the transition will be a lot slower, and there’s still a lot of power in the hands of the TV networks and the cable and satellite distributors … even if it’s not as much power as they had ten years ago. There are, for example, plenty of places to watch shows online — and even lots of increased investment in professionally produced “channels” online through Amazon, Google, Netflix and the like, all of whom are funding content development as well as trying to expand their distribution businesses … but traditional TV still has a very strong position with the people who care the most: advertisers. Online video ads are a very fast-growing market, but reports I’ve seen indicate that they’re only about 5% of the size of the traditional television ad market, and the strength of television has always been it’s power to create a mass market and homogenize society, urging essentially every single American, over the space of two or three days, to see the same movie or visit the same store at the mall that coming weekend.
It’ll be an interesting thing to watch, seeing if the increasing niche-ification of media and the distributed content continues to erode that mass market, but I have my doubts that it will happen all that quickly — car dealers and movie producers really want to be able to reach everyone, all at once, and they’ll pay a premium for it … with some exceptions it strikes me that it’s been the advertisers, not the viewers, who are willing to consistently pay for hit content.
But that’s just my squishy impression of the speed of the big picture transition, and it probably doesn’t mean anything. What we get from this teaser are three strong content-dominated companies, each of whom is very profitable and trading at a premium to the market, and each of which has shown enough growth and stability to (arguably, depending on what you think the future holds) deserve such a premium. Think Scripps Networks, Discovery Communications or Disney are right for your portfolio, or the best play on the revolution in video delivery? Let us know with a comment below.
Disclosure: I own shares of both Google and Apple among the companies featured above, I do not own Disney, Scripps or Discovery or other firms mentioned, and will not trade in any stock covered for at least three days.
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Well jimbo, you are just a bit off base about stocks. You are correct that when you buy a stock (at least most stocks) you are becoming a voting shareholder of a company. But the price of your stock is not based on company value, it is based SOLELY on what other potential investors think it’s worth at any given moment. In other words, a stock is a derivative, just like a mutual fund, an ETF, a REIT, a bond, or any other financial vehicle. Except in an IPO you don’t buy stock shares from the company, you buy them from some other investors who want to sell them. Those sellers have their reasons for selling, just as you have your reasons for buying. Psychology is perhaps the most important tool in investing. Knowing the market means knowing the investors. The best way to make money on stocks to buy the ones where the demand for them increases over time. You have to make an educated guess as to which ones people will actually want in the future. If you mis-guess the investor psychology, you lose. In the case of the Motley Fool recommendations, these three stocks will only increase in value if the demand for them increases. Hmmm…. all this marketing buzz that has been generated – will it succeed in increasing demand for them? Congratulations, we are all part of the marketing effort!
uh no actually even older now its year 2015. i’ve now spent like two hours reading all this whatever it is and seeing the dates no ones really posted anyting since jan. 2015 so… I’m bored tired of reading about people owning stocks i don’t even understand stocks but now i know you people are hellla boring. well good lucks on your stocks hahahaha. that video was a joke this site is a joke you all just wasted your own time i know because i just waisted mine reading everyones garbage post dumb dumb dumb. go to work do your job being on this blog is pointless who really cares what happens to t. v. everyone seems to want to pay for it so let them pay for it. i’ll just go out side and use mcdonalds or starbucks wifi. stream some movies while using a v2o downloader and not only will i wathch the move i’ll also now own it for free no internet bill no tv bill no 4g bill no buying a dvd and recorder. nope just plain and simple piracy. buy that stock
Oh yes, you are “smarterthanmeduh” when you don’t understand what investing has to offer. You may be able to pirate, watch, and own any movies, shows, music, and games… and that is great. but investing has the potential to cause you to earn MONEY, not free junk. So if you invest wisely, even a 100$ starting account could become a fortune compared to your sorryA$$ sitting outside trying to get a free wifi signal. Then you could pay for it and actually contribute to the American market system instead of trying to sabotage it. People who pirate only make me slightly angry… people who are stupid AND are pirating make me furious. eff. yew.
Mesh networking is coming. These are the steps
Step 1) In your spare time develop and release open source free cell phone operating system and give it away. (Androide)
Step 2) Map out and build database of nationwide wifi hotspots ( get sued for this one )
Step 3) Purchase core wifi/cellular systems manufacturer to own significant patents to modify wifi chips to broadcast a 10 watts. Also put USB port on most popular cable modem in America so it accept an external wifi device. (Motorola, get some heat from the Feds on this)
Step 4) Force Cisco to rerelease an open source model of their most popular wifi router by secretly funding BuffaloTech DD-WRT release.
Step 5) Develop and provide encrypted mesh protocols to be used in DD-WRT.
Step 6) put big shiny red button in Android app that is appealing to push.
Step 7) Discourage 100 million users from pushing that red button because the FCC has made large scale public Wifi networks illegal to operate because of pressure from the telecom lobby and Verizon. Also mention that as good citizens we should allow the NSA to skim and retain all our electronic communications as it should legal pas through AT&T and Verizon’s POP’s.
Step 8) Accidentally built the worlds largest fastest most secure redundant CPU sharing Data and storage sharing network.
Step 9) Compare Verizon network and it’s stock value to that of the pony express soon after the continental long line telegraph system was built.
Tom Conner had a new pick he just emailed today Something about an energy hog in everyone’s house They’re trading in for a less expensive one. I’m Guessing Ac/heat. And what is this whole google stock about? Anyone Have the ticket symbols ?
verizon always wins says:
with the advantage of hindsight, you can clearly see that all 3 of those companies have done well… doubled and more over last few years (dont forget to factor in that DISC A, B and K split at or near 2 for 1) but what the authors of the vid, and most other seem to be missing is, no matter whether any of the 3 companies take off like a rocket, or remain flat, it really doesn’t matter… it’s pretty much common sense that “on demand” type content is sure to only gain in popularity (and it also follows that traditional type tv programming is sure to stagnate some) … but regardless of how quickly any of it happens, and regardless of what content providers end up the big winners… it’s 100% guaranteed that the the big cable companies will always win… cox, comcast, verizon etc all OWN the coax and fiber that all that content will be streaming through, and they will surely get their tolls for every bit and byte that travels their unregulated, non-public utility designated fiber and coax… at&t and even more so, verizon are particularly well positioned at they not only own hardwired coax and fiber lines, but also dominate the wireless infrastructure… so they will be getting paid for data usage whether you’re getting through your phone, tablet, or at your home no matter how great any companies content is, and no matter how cheaply they can offer it, the only way to get it to you is through the gatekeepers…. as the percentage of end users purchasing their content from the cable/fiber/wireless owners, diminishes, those companies are 100% guaranteed to begin to throttle speeds and charge per unit data fees on everything… just look at current smart phone pricing plans, and see the future of anything you try to do online, every GB, MB etc used will have a price… all that “content” that everyone wants to see is high data usage video, and as everything keeps going higher definition, higher quality, the amount of bits, bytes, GBs, MBs used to transmit content continually grows….
verizon, at&t, comcast etc are all in far better position to be profitable than any entertainment company… no matter how great the content is and how cheaply it can be produced, you still need a way to get it to the end user, the gatekeepers are always going to get paid
I’d love to see Apple develop a system (and negotiate for space), relying on “broadcasting” from WiFi towers …. NO MORE CABLE COMPANIES! Apple could contract with some of the largest cable tower oner networks to have hardware mounted to cell towers, and “beam” TV/movie content over WiFi for a small basic subscription fee, and then you could “pick and choose” your add-on packages (i. e. HBO, Netflix, Sports, Movie, etc.).
No more cable lines needed to watch your TV device …. and your account could follow you almost world-wide for viewing!
If Comcast and TimeWarner, and the like don’t want to “play ball” with Apple (or Google), I say screw ’em, and let’s see Apple change the TV/Home Movie environment, just like they did with iTunes for Music.
Go get ’em Tim!
I do know this is old…And maybe I’ll be the last to comment, but the video is still up. So I wanted to comment on motley fool (Or MF as I call them because they are MFers). The only word I consistently come up with is Assholes! They offer some good stock tips, but if the stocks go down they say “Long Term”; Everything is long term, but it’s not that. Just look at that video. The guy claims he’ll tell you the 3 stocks, but he Does NOT. He says it will take 3 minutes; 35 minutes later you’re turning it off in disgust. And that my friends is exactly what it’s like to be a member. I was one and just gave up and asked for a refund, because whatever tips they have; it seems to me their main business is in Spamming you with emails (much like that presentation) trying to get you to buy more stuff from them. It’s maddening and you will hate them. At least I did.
almost 3 and a half years since this report DIS has done so well, but SNI and Disck not so much TMF and David Gardner likes to pride themselves in being right 60% of the time in this report that’s not the case.
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I think those are both wrong focus links in terms of the type of media company. We do not want distribution companies. We want pure content producers, ideally companies with very low production costs. Movie production companies fail this test because 90% of the profit in these businesses end up going to movie stars, not the shareholders. What makes companies like Discovery interesting is their ability generate high profit content at low costs. The whole point of this article is that the Internet is going to give them “free” distribution, so the underlying business becomes even more profitable and gets even more demand that translates to potentially higher pricing. None of the categories in the two articles you linked focus on these kinds of companies.
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At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors. Esta dedicación a dar a los inversores una ventaja comercial llevó a la creación de nuestro probado Zacks Rank sistema de clasificación de valores. Since 1986 it has nearly tripled the S&P 500 with an average gain of +26% per year. These returns cover a period from 1986-2011 and were examined and attested by Baker Tilly, an independent accounting firm.
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How to Find Trending Stocks
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A stock or security rarely moves in a linear direction; instead it fluctuates up and down. An investor can mine stock market data and identify a movement or trend in an industry or a stock by studying its performance over a period of time. Many financial analysts produce lists of trending stocks or industries. But trends can come and go quickly, and there is no official list or method for identifying trending stocks. Simple research techniques can be used to find stock trends.
Bottom-Up Method
Visit the website of a respected stock market or investment publication. These publications list stocks that are setting 52-week highs or lows. A high or low stock price could indicate an overall trend.
Select a stock from the list to view detailed data about it. Selecting a single stock to follow is referred to as a bottom-up method of finding trending stocks.
Select the option to view the stock's historical data. Historical data can be filtered by a time frame such as six months, one year or three years. The results typically are returned as a chart that shows a clear pattern of the rise and fall of the stock's price.
Note the movement of the stock's price. If the chart shows the price steadily climbing, this indicates the stock is trending up. If the chart shows movement up and down but overall the chart indicates downward movement, this stock's price is dropping and new highs are not occurring. This stock is trending downward.
Top-Down Method
Pay for a stock research service, or use free stock research tools offered by online financial-services companies to identify trending securities using the research service's proprietary software. Stock research software allows the user to select or screen stock groups and industries on a variety of criteria. Some software selects and presents trending stocks to users according to its own formula or guiding principles.
View industry data according to the software's options. By selecting and viewing recent and historical data about a specific industry, the investor can identify companies, and therefore securities, that warrant further research.
View the top 10 performing industries or groups of industries and drill down into the list to discover stocks that are trending. Again, the software typically includes the option of viewing historical data and charts that would show the rise and fall of stock prices. Just because a stock is part of an upward trending industry, that does not mean the stock itself is trending upward.
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The term "trending" indicates upward or downward movement. Highly trending stocks typically hold an upward trend for a period of time longer than a day or week.
The availability of historical data depends on how long the stock has been traded. The longer the stock has been traded, the more data is available. For instance, a stock that's been available for only six months will show only six months of data. A stock that has traded for three years or longer will have trending data for three years or longer.
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At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors. Esta dedicación a dar a los inversores una ventaja comercial llevó a la creación de nuestro probado Zacks Rank sistema de clasificación de valores. Since 1986 it has nearly tripled the S&P 500 with an average gain of +26% per year. These returns cover a period from 1986-2011 and were examined and attested by Baker Tilly, an independent accounting firm.
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The Proper Asset Allocation Of Stocks And Bonds By Age
To start, there is no “correct” asset allocation by age. But there is an optimal asset allocation I’d like to share in this post. Your asset allocation between stocks and bonds depends on your risk tolerance. Are you risk averse, moderate, or risk loving? I’m personally risk loving or risk averse, and nothing in between. When I see “Neutral” ratings by research analysts, I want to slap them upside the head for having no conviction. Then the optimist in me thinks what a great world to have occupations that pay well for providing no opinion!
Your asset allocation also depends on the importance of your specific market portfolio. For example, most would probably treat their 401K or IRA as a vital part of their retirement strategy because it is or will become their largest portfolio. Meanwhile, you can have another portfolio in an after-tax brokerage account like E*Trade that is much smaller where you punt stocks. If you blow up your E*Trade account, you’ll survive. If you demolish your 401K, you might need to delay retirement for years.
I ran my current 401K through Personal Capital to see what they thought about my aggressive asset allocation. To no surprise, the below chart is what they came back with. I essentially have too much concentration risk in stocks and am underinvested in bonds based on the “conventional” asset allocation model for someone my age. To run the same analysis on Personal Capital, simply click the “Investment Checkup” link under the “Investing” lengüeta.
I am going to provide you with five recommended asset allocation models to fit everyone’s investment risk profile: Conventional, New Life, Survival, Nothing To Lose, and Financial Samurai. We will talk through each model to see whether it fits your present financial situation. Your asset allocation will switch over time of course.
Before we look into each asset allocation model, we must first look at the historical returns for stocks and bonds. The goal of the charts is to give you basis for how to think about returns from both asset classes. Stocks have outperformed bonds in the long run as you will see. However, stocks are also much more volatile. Armed with historical knowledge, we can then make logical assumptions about the future.
HISTORICAL RETURNS FOR STOCKS
* The 10-year historical average return for the S&P 500 index is roughly 7%. The 60 year average is also roughly 7% after the most recent 38.5% drubbing in 2008. The S&P 500 closed up roughly 13% in 2014.
* The S&P 500 has been extraordinarily volatile over the past 20 years. The golden age was between 1995-1999. 2000-2002 saw three years of double digit declines followed by four years of gains until the economic crisis. In other words, there looks to be a 3-5 year run until performance reverses so watch out.
* The S&P 500 index is now over 2,000+, a record high as of 1/1/2016 as the stock market sanguinely marches on in the face of a slowdown in Europe, new quantitative easing in Japan, and continued low interest rates in the US. Oil prices have collapsed, and there are some issues in Russia. But with the US on a Fed rate hike course, things are going to be dicy for 2016.
HISTORICAL RETURNS FOR BONDS
Hovering around 2.35% as of 1/1/2016
* When things get good for stocks, they can get really good. Don’t forget to rebalance!
* From the first chart, you can see that the 10-year Bond Yield has been going down since 1982. In other words, 10-year bond prices have been going up for 30 years given there is an inverse relationship, making US Treasuries one of the best risk free performers.
* The second chart shows how stocks have trounced bonds since 1994. Unfortunately the chart cuts off at 2008 where the crisis occurs because this chart is from a bond shop called BondGroup. Their goal is to sell bonds, not stocks.
* Bonds have never returned more than 20% in one year. The two times the BarCap US Aggregate index came close was in 1991 and in 1995 when inflation was in the high single digits. Inflation is now around 1-2%, which puts a cap on bond yields.
CONVENTIONAL ASSET ALLOCATION MODEL
The classic recommendation for asset allocation is to subtract your age from 100 to find out how much you should allocate towards stocks. The basic premise is that we become risk averse as we age given we have less of an ability to generate income. We also don’t want to spend our older years working. We are willing to trade lower returns for higher certainty. The following chart demonstrates the conventional asset allocation by age.
* You believe in conventional wisdom and don’t want to overcomplicate things.
* You expect to live to the median age of 78 for men and 82 for women.
* You are not very interested in the stock market, bond market, or economics and would rather have someone manage your money instead.
NEW LIFE ASSET ALLOCATION MODEL
The New Life asset allocation recommendation is to subtract your age by 120 to figure out how much of your portfolio should be allocated towards stocks. Studies show we are living longer due to advancements in science and better awareness about how we should eat. Given stocks have shown to outperform bonds over the long run, we need a greater allocation towards stocks to take care of our longer lives. Our risk tolerance still decreases as we get older, just at a later stage.
* You plan to live longer than the median age of 79 for men and 82 for women.
* You’re not that interested in actively managing your own money, but depend on your portfolio to live a comfortable retirement.
* You plan to work until the conventional retirement age of 65, plus or minus 5 years.
* You are a health fanatic who works out regularly and eats in a healthy manner. Sugar is synonymous with poison, while raw is synonymous with utopia.
SURVIVAL ASSET ALLOCATION MODEL
The Survival Asset Allocation model is for those who are risk averse. The 50/50 asset allocation increases the chances your overall portfolio will outperform during a stock market collapse because your bonds will be increasing in value as investors flee towards safety. Bonds can also rise when stocks rise as you’ve seen in the historical chart above. That said, bonds sold off during the 2008-2010 economic crisis because investors lost all confidence in stocks and bonds. Money fled to money market funds instead.
* You believe the stock market has a higher chance of underperforming bonds, but are not sure given historical data points to the contrary.
* You are within 10 years of full retirement and do not want to risk losing your nest egg.
* You depend on your portfolio to be there for you in retirement due to a lack of alternative income streams.
* You are very wary of the stock market because of all the volatility, scams, and downturns.
* You are an entrepreneur who needs some financial safety just in case your business goes bust.
NOTHING TO LOSE ASSET ALLOCATION MODEL
Given stocks have shown to outperform bonds over the past 60 years, the Nothing To Lose Asset Allocation model is for those who want to go all-in on stocks. If you have a long enough time horizon, this strategy might suite you well.
* You are rich and don’t count on your stock portfolio to survive now or in retirement.
* You are poor and are willing to risk it all because you don’t have much to risk.
* You have tremendous earnings power that will continue to go up for decades.
* You are young or have an investment horizon of at least 20 more years.
* You believe you are smarter than the market and can therefore choose sectors and stocks which will consistently outperform.
FINANCIAL SAMURAI ASSET ALLOCATION MODEL
The Financial Samurai model is a hybrid between the Nothing To Lose model and the New Life model. I believe stocks will outperform bonds over the long run, but we’ll see continued volatility over our lifetimes. Specifically, I’m preparing for a new normal of 5 to 7% returns for stocks (from 8-10% historically) and -5 to 4% return on bonds from 4-7% historically. In other words, I believe bonds are expensive and have a higher risk of staying flat or losing money for investors who do not hold to maturity.
* You have multiple income streams.
* You are a personal finance enthusiast who gets a kick out of reading finance literature and managing your money.
* You are not dependent on your portfolio in retirement, but would like it to be there as a nice bonus.
* You enjoy studying macroeconomic policy to understand how it may affect your finances.
* You are an early retiree who won’t be contributing as much to their portfolios as before.
THE RIGHT ASSET ALLOCATION ALL DEPENDS ON YOU
By providing five different asset allocation models, I hope you are able to identify one that fits your needs and risk tolerance. Don’t let anybody force you into an uncomfortable situation. Ideally, your asset allocation should let you sleep well at night and wake up every morning with vigor. When it comes to investing, you need to calculate realistic risk reward scenarios and invest accordingly.
I encourage everyone to take a proactive approach to their retirement portfolios. Ask yourself the following questions to determine which asset allocation model is right for you:
* What is my risk tolerance on a scale of 0-10?
* If my portfolio dropped 50% in one year, will I be financially OK?
* How stable is my primary income source?
* How many income streams do I have?
* Do I have an X Factor?
* What is my Money Strength?
* What is my knowledge about stocks and bonds?
* How long is my investment horizon?
* Where do I get my investment advice and what is the quality of such advice?
Once you’ve answered these questions, sit down with a loved one to discuss whether there is congruency with your answers and how you are currently investing. Just because we’ve been in a four year bull run doesn’t mean you’re now an investment guru. It’s important not to overestimate your abilities when it comes to investing. We all lose money eventually, it’s just a matter of when and how much. Let’s just hope the party continues in 2015 and beyond!
Recommendation To Help Achieve Financial Independence
One of the best ways to build wealth is to get a handle on your finances by signing up with Personal Capital . They are a free online platform which aggregates all your financial accounts on their Dashboard so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 28 different accounts (brokerage, multiple banks, 401K, etc) to track my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing, how my net worth is progressing, and where my spending is going.
One of their best tools is the 401K Fee Analyzer which has helped me save over $1,700 in annual portfolio fees I had no idea I was paying. You just click on the Investment Tab and run your portfolio through their fee analyzer with one click of the button. Their Investment Checkup tool is also great because it graphically shows whether your investment portfolios are property allocated based on your risk profile. Aggregate all your financial accounts in order to get a good over view of your net worth and start building those passive income streams! It only takes a minute to sign up.
Personal Capital’s amazing Retirement Planning Calculator. How are your results?
About the Author: Sam began investing his own money ever since he opened a Charles Schwab brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at Goldman Sachs and Credit Suisse Group. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $150,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies, and writing online to help others achieve financial freedom.
Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of all the chaos. After 13 years of working in finance, Sam decided to retire in 2012 to utilize everything he learned in the business to help people achieve financial freedom sooner, rather than later. Sam is a big advocate of using free financial tools like Personal Capital to help people grow their net worth, track their cash flow, x-ray their portfolios for excessive fees, and plan for retirement. Knowledge + action = financial freedom!
You can sign up to receive his articles via email every time they are published three times a week. Sam also sends out a private quarterly newsletter with information on where he's investing his money and more sensitive information.
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I have a pretty low risk tolerance. I just hate losing money which is also why I don’t gamble. I loved all the analysis and data points that you included in this post. Volatility in stocks is nuts. I’m glad I’m not a portfolio manager or I’d be a major stress case. I have a fairly large fixed income allocation and don’t have any current plans to change it. I am thinking about getting more structured notes though as my CDs expire since your recent post got wheels turning.
I like the Financial Samurai asset allocation plan. However, once I hit 65, I probably would increase my bond allocation quite a bit. When you get older, your risk tolerance usually reduce quite a bit. My bond allocation went down a lot after I rolled over my 401k. I really need bump up my bond allocation, but the rate is so low right now.
I’d consider a stable value fund instead of a bond fund. It’s essentially a cash alternative with better yields.
I think it’s important to discuss what risk tolerance actually means. Volatility, for most people, isn’t really risk. How much your portfolio wiggles at 30 doesn’t have much to do with your risk of total loss at 70 years old. Volatility should be feared when you’re a net seller, not necessarily when you’re a net buyer.
It’s one thing to be conservative, but it has to be met with either lower retirement expectations or larger retirement contributions. A super conservative portfolio of treasuries and corporate bonds just means one big risk: you go broke in retirement. It’s another to be overly aggressive when you’re selling and find yourself in a 2009 scenario selling stocks at prices not seen for more than a decade.
If I had to pick one for life, I’d go 75% stock (50% S&P500, 25% consumer staples/utilities) and then 25% fixed income. Rebalance annually and keep the allocation forever. Ideally have some other kind of form of income (1-2 rental units) when nearing retirement for balance.
As I sit here in retirement today, I can unequivocally say that rental income is fantastic. My rental income is supporting my lifestyle as I just bank/reinvest any stock returns and dividends. Rental income just takes time.
I have a pretty high risk tolerance, and right now my asset allocation most closely resembles the ‘new life’ model although my mix will probably trend more aggressive compared to the chart at older ages.
From conversations I’ve had I think this past recession really put some permanent doubt in peoples minds & a lot of people will be trending to a more conservative going forward than they might have in the past.
No doubt the massacre of 2009/2010 is going to scar the existing generation of investors for a very long time, myself included.
My #1 tenet in investing is not to lose money! If I can’t make money, fine. I just refuse to lose.
Sam, I’m finding myself leaning more toward the financial samurai model. Let me answer some questions and see:
* What is my risk tolerance on a scale of 0-10?
Risk tolerance is a 8 – I like to take the risk because of the challenge and learning required to become a successful investor.
* If my portfolio dropped 50% in one year, will I be financially OK?
Yes, I would be ok. Since I have my emergency fund built up and I have a stable job, I can afford the loss.
* How stable is my primary income source?
Hasta aquí todo bien. Ancestry. com is a profitable company with no signs of letting up. Were that to change, I would reevaluate.
* How many income streams do I have?
I have Stocks/Dividends, Prosper. com interest. Lunch money from Google Adsense for a few websites that I don’t update anymore, a few hundred dollars monthly from a project that is doing well now with my twin brother, YouREview. Net, my day job, and in time, my new project I’m working on this year
* Do I have an X Factor?
If the X Factor is a blue sky scenario/shoot for the moon type of thing, then I hope it is the new project I am working on this year.
* What is my Money Strength?
It’s at a B - right now. I haven’t landed real estate as an additional income source.
* What is my knowledge about stocks and bonds?
If Apple does indeed go up from here on out, not as much as I thought. I’m at about a C right now in my knowledge. I have continued work to do to understand that market better.
* How long is my investment horizon?
I plan on investing for 30+ years without having to take money out.
* Where do I get my investment advice and what is the quality of such advice?
I get my advice from you Sam, and other members of the Yakezie. It’s the best I’ve seen so far.
— I really like the stock/dividend and prosper investing model. I can check a few things in my basement, in my underwear and the bulk of the work is using brain power. I’m also bullish in getting my own business to work, but know that will be more difficult.
I think you are doing great! With your time horizon, skills as a developer, and your initiative to work on multiple income streams, you should be fine. The FS model seems appropriate, but only you can decide.
The one thing to note is that things change all the time. You may think you can work for the next 20 years no problem, but I think you’ll be surprised if you work on your X Factor. Nunca sabes. But you’ll definitely never know if you don’t try. My article on Yakezie. com is something I’ve been thinking of trying. Worth a shot? ¡Tal vez! Gathering feedback now and need a developer.
I consider more than risk tolerance with my asset allocation. In retirement (this time) I will have all my basics covered by Social Security and a pension. That represents the fixed portion of my retirement. My stock market portfolio asset allocation is intended to shield me against a very volatile market and still be a growth portfolio. I expect to live 30 years in retirement and want sufficient funds to support my wants in life. In the next five years, I do expect to shift more funds into TIPS and dividend paying stocks (funds). I think I will stop at 20-25% though. This plan could change, but that is what it is today.
Ive always felt avoiding the latest meltdown in stocks is really the best investment strategy. Bear markets typically last .5-2 years and then you get a bull maket for several years until your next bear market and the cycle repeats itself. So simplistically the closer you are to the last bear market time-wise the more bullish you should be on stocks. I’m bullish on stocks in 2013 but am not as bullish as 2012. I’m slowly decreasing the percentage I have invested in stocks every year from now until the next bear market where I’ll try to buy back in and repeat the cycle.
If you can tell us when the next bear market will start (within the month is fine), shoot me an e-mail and give me a heads up would ya? I’ll even buy you a steak dinner as a reward.
Haha well I cant tell you when its going to start but the idea is the farther you get from 2009 the more cautious you have to be when the market enters a downtrend (just follow moving averages for simplicity). By now were far enough removed that I wouldnt be 100% in stocks but not far enough removed where I’m overly worried about a crash. There will be another crash someday in the future though and even if you only manged to save half your portfolio from the effects of it thats a huge deal especially if you can buy back in a year later anywhere close to the bottom.
any updated thoughts on this impending down-turn, as we’re now near the close of 2014 and it’s been Bull for some time? I’d love to get out in that right month too :)
I really like how you compared different models, but I’m disappointed that none of the models, with the possible exception of the FS model, really seem to be built for extreme savers. If my envelope math is anywhere near correct, I can go 100% stocks for about the next 10 years, growing a dividend income stream large enough to cover all of my expenses. I can then look into diversification across additional investment classes, provided that they produce income. This probably puts me closer to the Financial Samurai model.
The “Nothing To Lose Model” is 100% stocks until age 65 or whenever you no longer want to work, or have all your expenses covered by passive income.
The one key thing I want everybody to know is that we will all lose money eventually. Nobody can consistently beat the market, no matter how smart we think we are. Everything is easier said than done.
I ‘m definitely with the “nothing to lose” modelo. The return on government bonds currently are so low that you are actually losing money investing there. Certain corporate bonds do better, but again, its pretty limited. I’m also hopeful that my dividend stream in solid, reliable companies will grow large enough to cover my expenses such that I won’t need bonds into my retirement. You also have an automatic inflation hedge built in with dividends that you dont get with bonds (unless they happen to be TIPS - treasury inflation protected). Moving some of your income to bonds when you hit 65 does make some sense though, the time to take risk has probably passed you by at that point.
En efecto. At 65, or thereabouts… hopefully we’ve all developed a big enough nut where it’s all about living off the passive income generation rather than relying on capital increases.
We allocate our assets, our stocks, bonds, and cash, because we want to get the return that we are aiming for while minimizing the risk that we are exposed to. You need to decide how to divide your assets and choose an investment that will go with how you divide your money.
Thanks for reminding us about the asset allocation and its importance in relation to risk tolerance. I’m in my mid-30’s and have chosen 75% stocks, 25% bonds/cash equivalents. I probably need to increase my allocation in stocks. Thanks for the reminder.
Just ran into this site a couple of days ago after getting serious about my future and my family’s future. I’m totally hooked to the site, reading articles after articles trying to grasp everything I’m reading. I’m 24 years old, engaged and have a 1 year old son. Unfortunately I’m not doing to good on the savings side and am on my way towards creating a savings plan now. I’m curious to know how I can start to scratch the surface of investing in Stocks and Bonds. Maybe you already have an article on this? (for example if you recommend trying to start off with etrade or things of that nature) Or should I not even consider this until I have some money saved up?
just for added details I make $40k a year (and drowning in student loans lol. over $47k)
My apologies in advance for bombarding you with questions lol.
Thanks for taking the time out to read this! Any advise is appreciated.
Welcome to my site! Feel free to subscribe.
With the info you have provided, I would simply focus on contributing to your 401k/IRA and maxing those out first before spending more time in after tax investing. I’d also focus on paying down that debt.
I think Bond bubble is brewing right now. Fed is arbitrarily keeping the interest low by printing money, but sooner or later, interest rates will go higher, much higher. When that happens, having a large % allocated to bond in your late age can be lethal.
In my humble opinion, it doesn’t make sense to allocate more than 20-30% to bonds no matter how old you are. There are better ways to generate income with stocks than bonds.
I am a new hire at a large company with a great salary and am starting to contribute to my 401k from day 1. Ofcourse I will be maxing it out, receiving all employer contributions, etc. etc. but I am having trouble deciding where to allocate my 401k funds. I want to start off with high-risk high reward funds, seeing as I potentially have 30 to 40 years to invest. My current plan is to start out with almost 100% stocks. I’ve got 40% in a 30 year retirement fund (high risk), 40% in a low-fee S&P 500 index fund, 10% in emerging markets, and 10% in international stock (Europe & Pacific). I am very new to investing, but have been following your blog for some time. I’ve seen the bull market and it’s earnings the last few years and am wondering if I am now at a peak as I start investing. I am withholding my post tax income for the next 6mo to a year in a money market as I save up for a down payment on a condo (in a large city on the west coast). Being new to investing and not formally educated in finance and economics, I am having a hard time predicting any markets or even understanding trends of current markets (I’m still doing much research). What is your opinion on 401k allocation for a new hire? Also, as a side note, how would you consider the housing market over here on the west coast in the large cities? Prices have risen quite a bit since the real estate collapse and I missed buying during this time (still studying in college), but am wondering if it is still beneficial to jump in the housing market before it gets even pricier. My best guess would be to go for it because I doubt the banks would make the same mistake twice so soon, which would allow for real estate markets to steadily rise again. But like I said, I am no expert by any means.
I am new to the investment game….I am about to become eligible for my company’s 401k in which they match 50 cents to the dollar up to 8% of my contribution. My salary is only $33,500 but I have my annual review tomorrow so hopefully a raise will be coming. I am curious what your advice is as far as how aggressive I should be with where I put my money in my 401k. My company has about 12-15 funds where I can put my money ranging from low to high risk. We also have the option of just putting it into a moderate, growth or aggressive balanced portfolio where the investment company we use picks stocks/bonds for you.
I also have some money in my savings account that I am considering putting into a separate IRA as it is just sitting there accruing next to nothing. I have about $10k saved but I wouldn’t want to put it all in the IRA…suggestion on how much? Or if I should even invest this money?
If it helps…I am 35 yrs old.
Look at that S&P historical chart. Today really does look like 60’s and 70’s
chartists believe that long term bull markets come after a prolonged range bound period (10-20 years) and we must retest the low of the range once more before a 1980’s/90’s bull. Secretly I hope so I need to reason to sell bonds and go overweight stocks…
I joined an educational game design boutique and am apprenticing and learning skills as a producer of interactive learning experiences. Those may take many different forms, though web-based games for middle and high-school students are my current project.
I have a hard time with bonds right now as the interest rates are being kept artificially low and are due for a hike. Even the Fed has announced that they are going to hike rates ‘sometime soon’ and it seems like buying bonds now is betting on a sure loss.
Im not saying that one can ever time the market (if you can, by all means let me know), but to me this seems like a common sense observation that interest rates really can’t go anywhere but up.
MBA for Matt says
I’m considering doing a full-time MBA in the fall of 2016. Do I have enough time to put money in stocks/bonds, or should I shoot for a high-yield savings account? I am 27, make $80k a year, and have a wife+1.5 kids. I’ve got $20k in retirement and another $10K in cash.
On a side note, you should do a post about the costs of an MBA. I’d love your perspective.
Hi Sam – Thank you for taking the time to create such a comprehensive and thoughtful website. It’s been inspiring and motivating, and I’ve been rethinking my portfolio.
What allocation would you recommend for a 40 year old that does not own real estate? I live in NYC and renting is a better option for me than buying, especially with pricing right now. I’m currently Cash 55%, Equities 43%, and Bonds 2%.
I want to stay liquid just in case there may be buying opportunities in the coming years. With that said, I think that a greater exposure to bonds would make sense. But I don’t know how I feel about a such significant increase in bonds given the market today. And I’m unsure about putting more money in an equity index since the broader market has been performing well over the past years.
What you suggest for someone who most likely won’t be able to invest in real estate for at least another three to five years?
Thanks in advance, C
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RSU, ESPP and ESOP – Understanding Meaning and Taxation
Most of the people who join their first job, get benefits like RSU, ESOP and ESPP as part of their CTC package (infact this is how employers show a high CTC while recruiting).However most of the employees do not understand these things in the beginning. Over the next few months, they start getting some knowledge about these benefits as employee.
A lot of people confuse these 3 things with each other and often do not have a full understanding of what they mean and how they work and what are the tax implications when they exercise their benefits. We will now take each one of these and understand them.
In this articles lets understand all these 3 things – RSU. ESOP and ESPP in detail.
1. RSU (Restricted Stock Units)
RSU or Restricted Stocks units are very simple to understand. The Company gives company Stock to an employee without any conditions, however there is a vesting period involved. Vesting Period is the tenure for which you will have to wait, before you can claim those shares. So if a company gives you 100 RSU vesting in 2 yrs. That simply means that after 2 yrs, you will get 100 stocks of the company. It will be all yours and you are free to keep them or sell them after that. RSU’s are also a great way to reward the employees, like in 2012 WIPRO awarded 4.5 million RSU’s to its 1200 employees (mostly top management).
RSU’s are a great way to make sure that the employee stays with the employer for long term. Imagine a company, who gives 1000 RSU’s vesting in 4 yrs. An employee will thinking many times before changing his job, because if he leaves the job and moves to another company, then he will loose those RSU’s, which might be worth a lot of money depending on the stock price. I had myself got RSUs from Yahoo. when I joined them, but due to their declining stock price over so many years, RSUs were not a great motivator for me. It was just a bonus amount for myself.
RSU can also be given in phased manner sometimes, like 25% RSU each year. So if company is giving 100 RSU’s with condition of 25% RSU vesting each year, then 25 shares will vest in first year, then another 25% in 2nd year and like this, only after 4th year, an employee will be able to get all 100 stocks.
Its worth noting that if you leave a job, a lot of companies require you to sell your RSU’s in next few months. for example next 3 months.
2. ESOP (Employee Stock Options)
Employee Stock Options or ESOP are generally given by most of the big companies in India, especially IT companies which are listed outside India. ESOPs are nothing but “OPTIONS”, which are also in stock market in India (remember Future & Options?)
Let me tell you what Stock Options are in general. If a person has a Stock Option. he actually has a right to BUY a stock in future at a pre-decided price agreed at the time of giving those stock options. So in future whatever is the market price does not matter, you always have an option to buy it at the price which was agreed upon. In this case if market price of the stock is above the pre-decided price, then you can just exercise your options of buying the stock and instantly you will be in profit. If however, the current market price is less than the pre-decided price, then you choose not to exercise the stock option at all and nothing happens.
Dejame darte un ejemplo. Let’s say that an employee joins a company on 1st Jan 2013. His company gives him 500 ESOPs with vesting period of 3 yrs and at the vesting price of Rs 200. What this means is that his vesting date is 1st Jan 2016 (after 3 yrs). On that date, he has a OPTION to buy 500 stocks of the company at Rs 200 if he wishes. Now lets say on 1st Jan 2016 …
Case 1 – The stock price is Rs 800
In this case, the employee can exercise his option and he can get 500 stocks at only Rs 200. At this moment, the employee will make a clean profit of Rs 600 each shares and a cool Rs 3,00,000. Note that he does not have to pay anything here, when he exercises his option, he will automatically get his profit without putting anything from his pocket. It makes sense to exercise his option in this case, because vesting price is less than market price.
Case 2 – The stock price is Rs 130
In this case, it does not make any sense to exercise, because you will be in loss, because the price you have to pay is less than market price, so you let this option go.
Nota . In case of stock options, you can never make any loss, it will always be some profit only.
3. ESPP (Employee Share Purchase Plan)
ESPP or Employee Share Purchase Plan is a benefit given by employer to its employees to purchase the stock of the company at a discounted price. In an ESPP plan, an employee has to contribute a part of this salary in ESPP plan each month. An employee can choose how much of his salary he wants to contribute by himself. It can range from 1% to 15% of his salary. All the money which he contributes gets accumulated for few months and then in one go, stocks are purchased for him at some discounted price. On what price the discount will be given depends on your company EPSS plan. However in general its the minimum of the prices in the start of the EPSS plan and at the end of the ESPP plan. Dejame darte un ejemplo.
Suppose your company offers a ESPP plan twice a year which you can opt for, one window opens is Jan-June (where you can join in Jan only) and other is July to Dec (You can join in July only). So you will have to tell the company how much you want to contribute each month before hand. If you choose it to be 10%. then 10% of your salary will be cut for ESPP plan and you will get the rest in your hand.
Now suppose a person chooses Jan-June window and he is contributing 10,000 a month for this, then in next 6 months, he will accumulate Rs 60,000 for ESPP, and now at the end of the Plan he will be able to get the shares.
What will be the share price considered for him.
Let’s say that the stock price in the start of the plan (Jan month) was Rs 100 and the stock price at the end of the plan (June) was Rs 120. Then the stock price considered for him will be minimum of 100 and 120. which is Rs 100 and on this he will get 15% additional discount and his final price would be Rs 85 only.
Note that this example is assuming that minimum of two is taken. your company EPSS might just consider the “starting price” or “ending price”. So please look at your company EPSS plan in detail.
When to choose ESPP plan ?
ESPP is a great way to get the stock price at discount, but one should anyways take care of few things. If company’s future prospects look great in future, then one should buy the stocks anyway, so ESPP becomes a great deal where you sure shot get 15% discount. However if company’s prospects look bad in future, then you have to figure out if it’d make any sense to go for ESPP plan or make a better use of your money elsewhere.
Below is a video from Salesforce which explains their ESPP plan, watch it to get a feel of how EPSS works ?
Taxation on RSU, ESOPs and ESPP
The taxation for RSU, ESOP’s and ESPP is governed by same rules, as all of them have to deal with stocks which a employee acquires and the taxation is pretty simple to understand. There are just two rules.
Tax to be paid in India
When you sell the your RSU/ESOP/ESPP (after vesting period is over) and get back the money, its your responsibility to pay the tax on the amount in India. How much tax is to be paid by you, depends on the nature of the gains. If you sell the shares before 1 year of acquiring the shares, then the gains are called Short Term Capital Gains (STCG) and if you sell the shares after 1 year, then the gains will logically be Long Term Capital Gains.
If stocks are listed in indian stock exchanges, then you have just have to pay 15% tax on Short Term Capital Gains and no tax on long term capital gains. However if stocks are not listed on indian stock exchanges, but some foreign country. then you will have to add the short term capital gains tax in your income and pay tax as per your slab rate, and 20% with indexation on the long term capital gains. which is the case when STT is not paid when the transaction is done.
Below is the simple table which will explain things to you
Short Term Capital Gain (Less than 1 yr)
Long Term Capital Gain (More than 1 yr)
Hi Manish, I need your help here. I joined a company in India 6 years ago and got 100 ESOP at vesting price $1/share. When I left company the price was $3/share. To buy the ESOP I paid $100 + Income tax of flat 30% on $2 (Price when I left company – Vesting Price). I guess it is called capital gain. Now Company may go IPO next year in USA. Here are my question
1. Can I sell my stocks when company go IPO. Some website says that ex-employee can not share stocks still one year from the date of IPO. ¿Es esto cierto?
2. What happens to the Tax paid on additional $2. How can I show my earlier tax paid. Assuming market price $6, Will I have to pay Income tax on just $3. If yes, how much % of tax needs to be paid.
3. Since company will be listed in US. Will I have to pay tax in USA and India. I never been to USA. If yes, how much % in india and how much % in USA. If only in india, how much % tax.
4. What all things can I do to save tax.
1. This will be decided as per your company policy. You should read your contract for this
2. Did you pay tax in US or India. I think there is a form which you need to fill up (I dont remember the form name) and then you will get a certificate
3. Due to double tax treaty, if you have already paid tax in US. then you dont need to pay that in INdia, but you need to show a certificate for this. I suggest you hire a good CA on this matter
Hola. I had acquired some rupee denominated shares of my previous employer based in India through ESOP. They were vested in 2008. As the company has not listed itself on to the stock exchange (yet to go through IPO), the shares are blocked i. e. I am not allowed to sell. However out of blue, they have paid me some dividend income and that income has been paid in to my bank account few months back. How should I treat the taxability of this income in my income tax returns for AY 2014-15?
Generally companies do not cut the tax, but that might have changed in last few years. You will not be able to claim LTCG. because its not listed on Indian stock exchange. so its out of the tax purview here .
In case of ESPP, here is what happens with my company (US Nasdaq listed)
As mentioned above, at the time of purchase, the 15% gain (as we received the stock at 15% discount) is calculated based on FMV, and taxed immediately as short term / income tax here in India.
For subsequent purchase, you have mentioned less than 1 year as short term and more than one year as long term.
However information I received is that in case of “Foreign Listed Stocks/Companies), someone mentioned Long term as 2 years, others as 3 years. (I have no particular reference to back this information).
Could you confirm that Long term is indeed more than 1 year ?
STCG is taxable at 15% while LTCG is taxable at NIL (STT has to be paid).
Gains from Derivatives (Futures and Options ) are always taxable. I guess, in India we do not have Long-term derivatives. So, the question of LTCG in derivatives does not arise.
But, I am not sure about ESOPS. Its essentially a Derivative product (Options). I see no reason why the tax should be zero.
I guess I will have to dig in more to find out.
Will get back to you.
Anyways, as always, a very interesting article.
Thanks for sharing that knowledge !
Can you please help me understand if employer needs to deduct tax while vesting RSUs to employees? this is regarding RSUs alloted by US MNC listed on NYSC and RSU vested to Indian employee based in India.
in another scenario, if employee has bank account in US, can he show income & sell both in US and what will be tax impact in that scenario?
I was into similar situation when I was in YAHOO in bangalore. in mycase. when my RSU;s vested, Yahoo did not cut any tax from their side in India, I had to pay my own tax. Not sure what rules changed from that time !
Mansh, u have given excellent information for corporate employee. but I have some query. our company gives us ESOP and our company also deduct tax at the time of exercise(purchase the share). Tax deduction is applicable :- exercise day Market rate –ESOP rate=profit amount*30%. my question? 1.any tax applicable now? 2.If any sell after 1 year of same share any tax applicable?
What they are deducting must be TDS. so in a way you are giving the tax. but the point is if you really have to pay the tax @30%. are you in 30% tax bracket. If no. then you are eligible for tax refund for the excess amount. Talk to your CA on this
With abolishment of FBT, employers have to deduct perquisite tax at the rate of current tax slab. Since employer knows tax slab of employee it should get deducted at correct rate however due to other income/deduction it may be incorrect and needs to be corrected in returns.
This is what happens where I work (MNC)
RSU – At time of vesting, the value is added as to your income as “perquisite”. For example, let’s say you received 100 RSUs for 4 years with 25% vesting each year. so each year 25 RSUs vest. So 25 X stock price X dollar value is added to your income. Now its up to you when you sell those RSUs and when you sell if you make a gain or loss. For gain, we need to declare this separately while filing returns. What about this when we make a loss? Can we carry the loss forward and offset it or get a refund?
ESPP – Similar to RSU. The 15% profit is added to your income as “perquisite”.
ESOP – At the time of vesting, nothing is added to your income. But when you sell, the profit is added to your income and taxed as “perquisite”. So there is no separate tax implication.
Sí. for RSU. you can carry it for next 8 yrs just like normal equity sales
For ESPP. if the tax is being deducted by company itself, then they are depositing it with govt as TDS anywyas. you dont need to pay it seperatly !
For ESPP taxation of MNC US companies. May be depends on company, I don’t think TDS will apply here. Suppose 15% is the discount given by employer, that equivalent India converted INR are taxable income for that financial year in India. During selling time, the capital gain is not taxable in india, but taxable in US (will remit after deduction on gain).
Where could I download data for Advance-Decline-Unchanged issues for NYSE, AMEX and NASDAQ as far back in history as possible (NYSE data starts in March 1965, AMEX data starts in February 2002, NASDAQ data starts in January 1978.) The best resource for download I was able to find until now is unicorn. us. com/advdec which is really great. Unfortunately with data only from 2002. I am looking for NYSE Up/Dn Issues and volume since 1965. Thanks for any hints where to get this. & Ndash; user1392 Sep 16 '11 at 9:53
I don't know how interested you are in the CME data, but I have been learning about options and volatility modeling. I have been working with delayed CME data.
I have been able to extract the JSON queries and now have been able to run them in my. NET application to get data for every asset type.
Exmaple of ES options data:
Run the query below in Chrome and you will see the JSON response. In other browsers you will be prompted to download the JSON file.
The link below asks CME server to return back options data for given strikes:
I have been able to get other data as well by just changing the contract Code.
To parse it you just use the. NET Serialization class (add reference to system. web. extensions and using System. Web. Script. Serialization; on. NET framework 4.0)
-- (historical) stock prices --
¿Qué quieres decir con eso? Nominal, real, corrected due to monetary-base-change, corrections with Y-other-things? What is your goal?
I have been able to download (historical) stock prices via yahoo and google.
Alas looking historical data from Google/Yahoo's screeners can be highly misleading and making conclusion based on it very dangerous. Please, note that you cannot always trust the data, sometimes they are nominal or real, and sometimes you won't know the type of data. Google/Yahoo are only third-parties to provide you the historical data.
CSI Data. it claims to be the provider to Google, Yahoo, Microsoft and other resellers
Yahoo's providers here and notice the small writings at the bottom here
Educational and Research Data
Shiller Data about stock market data
the huge data collection by Ibbotson, book, inflation, interest rates and such things which you must take into account to do any serious research
Yale databases (massive work done) here
Intelligent Asset Allocator - book, by William Bernstein, in the very end has a summary of very good data sources
Would you say Yahoo finance's daily data with adjustment for dividends and splits are reliable in the sense that you could use them for research? Because I'm having trouble finding data thats adjusted for dividends/finding dividends data separately. Do you know if the dividends are adjusted for by the date the dividends are actually paid or on the ex-dividend day? & Ndash; Good Guy Mike Mar 7 '13 at 19:31
Academic access to Thomson Reuters Tick History:
The Thomson Reuters Tick History database provides millisecond-timestamped tick data going back to January 1996, covering 45 million OTC and exchange-traded instruments worldwide. The database currently updates at a rate of 1 million messages per second and is around 3 Petabytes uncompressed. It is a comprehensive, accurate and precise historical record of market behaviour. Includes API and MATLAB API access. Contact Sirca for more information.
For updates on the data offering check: Dinkum Data
I've used Livevol in the past. They gave me a URL that I was supposed to download a CSV from every 30 seconds. I wrote a script to wget the file and check its embedded timestamp, then save to disk. A "subscriber" would monitor the destination directory via inotify() and load any new CSV. Effectively, I had used the file system as a ticker plant, which got around the API issue. & Ndash; chrisaycock Jul 27 '11 at 18:43
@chrisaycock Thanks for the info. Was it a good service overall (reliable, accurate, any issues)? & Ndash; Tal Fishman Jul 27 '11 at 22:59
A different trader wanted it for a few months for his model. I didn't use the data myself, so I'm not sure what its quality is like. & Ndash; chrisaycock Jul 28 '11 at 14:26
Stock Options Indicator Flashes Bullish… With A Caveat
Call buying of stock options has been extremely subdued relative to puts recently – typically a bullish contrarian signal; however…
We are not the first or only ones to point out that the current post-February stock rally has been less than enthusiastically received by the trading community. While there are some exceptions, most intermediate-term sentiment gauges are either leaning towards fear levels or, at best, neutral.
One example comes from the equity options market where daily call buying in recent days has reached a nearly unprecedented streak of subdued levels relative to put buying. This has typically been a bullish sign for the stock market – however, the current signal is anything but typical.
To wit: We’ve covered the International Securities Exchange Equity Call/Put Ratio (ISEE) on several occasions over the years. As a refresher, due to its unique construction, the ISEE has been a favorite indicator of ours for highlighting short-term inflection points in investor sentiment. The ISEE excludes firm trades that are quite likely to be hedges and also excludes volume on closing positions when calculating the Call/Put ratio. Therefore, the ISE argues that its ratio is a more pure indication of investor sentiment than some of the other options ratios.
The 100 level in the ISEE has historically often been a signal that options traders are becoming fearful (100 means equal call and put volume). Dips below that level have been common near short to intermediate-term lows in the market as traders have either stormed into puts and/or have shied away from buying call options. Therefore, stock market returns have been quite bullish following such readings. And they have been particularly bullish after the ISEE has been below 100 for consecutive days. This had occurred just 11 times since the inception of the ISEE data in 2006.
Now, you can make it 12. Only, it hasn’t just been 2 days in a row, but 4 that the ratio has been below the 100 level. This is 2nd longest streak ever, behind the 5-day streak from February 5-11 this year.
These are the dates of all 12 occurrences:
You may recognize some of the dates right off the bat as short to intermediate-term lows. Indeed, the general pattern has been that, after a few volatile days, the S&P 500 consistently out-performs over the next few weeks to months. Here are the statistics:
As the table shows, S&P 500 returns 2 days after the streak ended were a toss-up. Amazingly, by the following day, 10 of the 11 were positive. And the performance stayed good in the weeks-months following as well. 9 of the 11 were positive 1-2 weeks later. And the median return after 1 month was +3.8%, 3 times the S&P 500′s normal return. So, do we have a green light here to buy stocks? Not so fast…
The setup surrounding the current version of this streak is somewhat atypical compared to the others. And the reasons that make it atypical somewhat align it with prior instances which failed to lead to positive returns going forward, namely September 2014 and August 2015. Why is it atypical? The readings are occurring into a 1-month rally, rather than into a selloff, which is the norm. Considera lo siguiente:
At +7.40%, it is the only streak besides August 2015 that occurred when the S&P 500′s 1-month return was positive. Add in September 2014 (-0.76%), and you have the only 3 events with 1-month returns better than -2.35%.
Similarly, at roughly 18 yesterday, it is the only event besides last August and September 2014 to occur while the S&P 500 Volatility Index (VIX) was trading at less than an 19-handle.
What this all spells out is that our present circumstances do not necessarily paint the picture of short-term “fear” that has accompanied most of the other occurrences. It does not guarantee that the stock market will follow in the footsteps of last August and September 2014 and suffer considerable weakness from here. However, in our view, the circumstances surrounding the current streak definitely temper the confidence in an imminent, fear-driven short-term bounce.
Furthermore, the increasing occurrences of sub-100 readings over the past 18 months are causing us to question the usefulness of this once very accurate indicator, at least when occurring in these atypical circumstances. Thus, while we certainly would not argue that this is a bearish signal, it can’t be trusted as the bullish signal it once was.
Gracias por leer.
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
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Copyright y copia; Zacks Investigación de Inversiones
At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors. Esta dedicación a dar a los inversores una ventaja comercial llevó a la creación de nuestro probado Zacks Rank sistema de clasificación de valores. Since 1986 it has nearly tripled the S&P 500 with an average gain of +26% per year. These returns cover a period from 1986-2011 and were examined and attested by Baker Tilly, an independent accounting firm.
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Los datos de NYSE y AMEX tienen al menos 20 minutos de retraso. Los datos de NASDAQ tienen al menos 15 minutos de retraso.
Economic Policy Institute
CEO Pay in 2012 Was Extraordinarily High Relative to Typical Workers and Other High Earners
Issue Brief #367
The 1980s, 1990s, and 2000s were prosperous times for top U. S. executives, especially relative to other wage earners and even relative to other very high wage earners (those earning more than 99.9 percent of all wage earners). Executives constitute a larger group of workers than is commonly recognized, and the extraordinary pay increases received by chief executive officers of large firms had spillover effects in pulling up the pay of other executives and managers.1 Consequently, the growth of CEO and executive compensation overall was a major factor driving the doubling of the income shares of the top 1.0 percent and top 0.1 percent of households from 1979 to 2007 (Bivens and Mishel 2013). Income growth since 2007 has been very unbalanced as profits have reached record highs and, correspondingly, the stock market has boomed while the wages of most workers (and their families’ incomes) have declined over the recovery (Mishel et al. 2012, Mishel 2013). It is useful to track CEO compensation to assess how well this group is doing in the recovery, especially since this is an early indication of how well other top earners and high-income households are faring through 2012. This paper presents CEO compensation trends through 2012 and finds:
Trends in CEO compensation last year:
Average CEO compensation was $14.1 million in 2012, using a measure of CEO pay that covers CEOs of the top 350 firms and includes the value of stock options exercised in a given year (“options realized”), up 12.7 percent since 2011 and 37.4 percent since 2009. This is our preferred measure.
Average CEO compensation using a measure that covers CEOs of the top 350 firms and includes the value of stock options granted to an executive (“options granted”) was $10.7 million in 2012, 7.1 percent lower than in 2011 though still 9.1 percent greater than in 2009. Firms apparently pared back the value of new options granted because CEOs fared so well by cashing in options as stock prices grew.
Longer-term trends in CEO compensation:
From 1978 to 2012, CEO compensation measured with options realized increased about 875 percent, a rise more than double stock market growth and substantially greater than the painfully slow 5.4 percent growth in a typical worker’s compensation over the same period.
Using the same measure of options-realized CEO pay, the CEO-to-worker compensation ratio was 20.1-to-1 in 1965 and 29.0-to-1 in 1978, grew to 122.6-to-1 in 1995, peaked at 383.4-to-1 in 2000, and was 272.9-to-1 in 2012, far higher than it was in the 1960s, 1970s, 1980s, or 1990s.
Measured with options granted, CEOs earned 18.3 times more than typical workers in 1965 and 26.5 times more in 1978; the ratio grew to 136.8-to-1 in 1995 and peaked at 411.3-to-1 in 2000. In 2012, CEO pay was 202.3 times more than typical worker pay, far higher than it was in the 1960s, 1970s, 1980s, or 1990s.
CEO compensation relative to other high earners:
Over the last three decades, CEO compensation grew far faster than that of other highly paid workers, those earning more than 99.9 percent of other wage earners. CEO compensation in 2010 was 4.70 times greater than that of the top 0.1 percent of wage earners, a ratio 1.62 higher (a wage gain roughly equivalent to that of 1.6 high wage earners) than the 3.08 ratio that prevailed over the 1947–1979 period.
Also over the last three decades, CEO compensation increased further relative to other very high wage earners than the wages of college graduates grew relative to those of high school graduates.
These findings show that CEO compensation growth reflects not just the increased market value of highly paid professionals in a competitive market for skills (the “market for talent”) but the presence of substantial rents embedded in executive pay. Consequently, if CEOs earned less or were taxed more there would be no adverse impact on output or employment.
CEO compensation trends
Table 1 presents trends in CEO compensation from 1965 to 2012.2 The data are for two different measures of compensation of CEOs in large firms. The measures differ only in their treatment of stock options: one incorporates stock options according to how much the CEO realized in that particular year by exercising stock options available (“options realized”), and the other incorporates the value (the Black Scholes value) of stock options granted that year (“options granted”). The options-realized measure reflects what CEOs report as their Form W-2 wages for tax reporting purposes and is what they actually earned in a given year. This is the measure most frequently used by economists.3 The options-granted measure (using the value of stock options) is sometimes referred to as “estimated pay” because firms do not know the ultimate value of the options at the time they are granted. In addition to stock options, each measure includes salary, bonuses, restricted stock grants, and long-term incentive payouts. Full methodological details for the construction of these CEO compensation measures and benchmarking to other studies can be found in Mishel and Sabadish (2013).
CEO compensation, CEO-to-worker compensation ratio, and benchmarks, 1965–2012 (2012 dollars)
* The "Options realized" compensation series includes salary, bonuses, restricted stock grants, options exercised, and long-term incentive payouts for CEOs at the top 350 firms ranked by sales. The "Options granted" compensation series includes salary, bonus, restricted stock grants, options granted, and long-term incentive payouts for CEOs at the top 350 firms ranked by sales.
** Annual compensation of the workers in the key industry of the firms in the sample.
*** Based on averaging specific firm ratios and not the ratio of averages of CEO and worker compensation.
Source: Authors' analysis of data from Compustat's ExecuComp database, Federal Reserve Economic Data (FRED) from the Federal Reserve Bank of St. Louis, the Current Employment Statistics program, and the Bureau of Economic Analysis NIPA tables.
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CEO compensation reported in Table 1, as well as throughout the rest of the report, is the average compensation of the CEOs in the 350 publicly owned firms (i. e. firms that sell stock on the open market) with the largest revenue each year. For comparison, Table 1 also presents the annual compensation (wages and benefits of a full-time, full-year worker) of a private-sector production/nonsupervisory worker (a group covering more than 80 percent of payroll employment), allowing us to compare CEO compensation with that of workers overall. From 1995 onward, the table identifies the average annual compensation of the production/nonsupervisory workers in the key industries of the firms included in the sample. We take this compensation as a proxy for the pay of typical workers in these particular firms.
The modern history of CEO compensation is as follows, starting in the 1960s. Even though the stock market (as measured by the Dow Jones Industrial Average and S&P 500 Index and shown in Table 1) fell by roughly half between 1965 and 1978, both measures of CEO pay increased by 78.7 percent. Average worker pay saw relatively strong growth over that period (relative to subsequent periods, not relative to CEO pay or pay for others at the top of the wage distribution). Annual worker compensation grew by 23.7 percent from 1965 to 1978, only about a third as fast as CEO compensation growth over that period.
CEO compensation grew strongly throughout the 1980s but exploded in the 1990s and peaked in 2000, increasing by more than 200 percent just between 1995 and 2000. Chief executive pay peaked at around $20 million in 2000, a growth of 1,279 percent (options realized) or 1,390 percent (options granted) from 1978. This increase even exceeded the growth of the booming stock market, the value of which increased 513 percent as measured by the S&P 500 or 439 percent as measured by the Dow Jones Industrial Average from 1978 to 2000. In stark contrast to both the stock market and CEO compensation growth, private-sector worker compensation declined a startling 3.6 percent over the same period.
The fall in the stock market in the early 2000s led to a substantial paring back of CEO compensation, but by 2007 (when the stock market had mostly recovered) the options-realized measure of CEO compensation returned close to its 2000 level. Figure A shows how the options-realized metric fluctuates in tandem with the stock market as measured by the S&P 500 Index, confirming that CEOs tend to cash in their options when stock prices are high. The financial crisis in 2008 and the accompanying stock market tumble knocked CEO compensation down by 44 percent (options realized) and 23 percent (options granted) by 2009. By 2012 the stock market had recouped much of the ground lost in the downturn and, not surprisingly, CEO compensation with realized options had also made a strong recovery. In 2012, average CEO compensation measured with options realized was $14.1 million, up 12.7 percent since 2011 and 37.4 percent since 2009. CEO compensation with options realized in 2012 remains below the peak earning years of 2000 and 2007 but, as we show below, remains far above the pay levels of the mid-1990s and much farther above CEO compensation in preceding decades.
Options-realized CEO compensation and the S&P 500 Index, 1965–2012
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The increase in CEO pay over the past few years reflects improving market conditions driven by macroeconomic developments and a general rise in profitability. For most firms, corporate profits continue to improve and corporate stock price is moving accordingly. It seems evident that individual CEOs are not responsible for this broad improvement in profits in the past few years, but they clearly are benefitting from it.
This analysis makes it clear that the economy is recovering for some Americans, but not for most. The stock market and corporate profits have rebounded following the Great Recession, but the labor market remains very sluggish. Those at the top of the income distribution, including many CEOs, are seeing a strong recovery while the average worker is still experiencing the detrimental effects of a stagnant labor market. Compensation for private-sector workers fell 0.5 percent over the last year and remains below the 2009 level.
Trends in the CEO-to-worker compensation ratio
Table 1 also presents the trend in the ratio of CEO-to-worker compensation to illustrate the increased divergence between CEO and worker pay over time. This overall ratio is computed in two steps. The first step is to construct, for each of the largest 350 firms, the ratio of the CEO’s compensation to the annual compensation of workers in the key industry of the firm (data on the pay of workers in any particular firm are not available). The second step is to average that ratio across all the firms. The last two columns in Table 1 are the resulting ratios in select years. The trends prior to 1995 are based on the changes in average CEO and private-sector production/nonsupervisory worker compensation. The year-by-year trends are presented in Figure C .
CEO-to-worker compensation ratio, with options granted and options realized, 1965–2012
Note: This figure uses the "Options granted" compensation data series which includes salary, bonuses, restricted stock grants, options granted, and long-term incentive payouts for CEOs at the top 350 firms ranked by sales. This figure also uses the "Options realized" compensation data series which includes salary, bonuses, restricted stock grants, options exercised, and long-term incentive payouts for CEOs at the top 350 firms ranked by sales.
Source: Authors' analysis of data from Compustat's ExecuComp database, the Current Employment Statistics program, and the Bureau of Economic Analysis NIPA tables
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Depending on the CEO compensation measure, U. S. CEOs of major companies earned 20.1 or 18.3 times more than a typical worker in 1965; this ratio grew to 29.0-to-1 or 26.5-to-1 in 1978 and 58.5-to-1 or 53.3-to-1 by 1989 and then surged in the 1990s to hit 383.4-to-1 or 411.3-to-1 by the end of the recovery in 2000. The fall in the stock market after 2000 reduced CEO stock-related pay (e. g. options) and caused CEO compensation to tumble until 2002 and 2003. CEO compensation recovered to a level of 351.3 times worker pay by 2007, almost back to its 2000 level using the option-realized metric. The CEO-to-worker compensation ratio based on options-granted, however, returned only to 244.1-to-1 in 2007, still far below its height in 2000 (yet still substantially higher than the 1995 ratio of 136.8). The financial crisis in 2008 and accompanying stock market decline reduced CEO compensation after 2007–2008, as discussed above, and the CEO-to-worker compensation ratio fell in tandem. By 2012 the stock market had recouped much of the value it lost following the financial crisis. Likewise, CEO compensation has grown from its 2009 low, and the CEO-to-worker compensation ratio in 2012 had recovered to 272.9-to-1 or 202.3-to-1, depending on the measurement of options.
CEO pay relative to other highly paid workers
CEO compensation has grown a great deal but so has pay of other high-wage earners. To some analysts this suggests that the dramatic rise in CEO compensation was driven largely by the demand for the skills of CEOs and other highly paid professionals. This interpretation, then, is that CEO compensation is being set by the market for “skills” and is taken as evidence that rising CEO compensation is not due to managerial power and rent-seeking behavior (Bebchuk and Fried, 2004). One prominent example of the “it’s other professions, too” argument comes from Kaplan (2012a, 2012b). For instance, in the prestigious 2012 Martin Feldstein Lecture, Kaplan claimed:
Over the last twenty years, then, public company CEO pay relative to the top 0.1 percent has remained relatively constant or declined. These patterns are consistent with a competitive market for talent. They are less consistent with managerial power. Other top income groups, not subject to managerial power forces, have seen similar growth in pay. (Kaplan 2012 a, 4)
And in a follow-up paper for the CATO Institute, published as a NBER working paper, Kaplan expanded this point further:
The point of these comparisons is to confirm that while public company CEOs earn a great deal, they are not unique. Other groups with similar backgrounds–private company executives, corporate lawyers, hedge fund investors, private equity investors and others—have seen significant pay increases where there is a competitive market for talent and managerial power problems are absent. Again, if one uses evidence of higher CEO pay as evidence of managerial power or capture, one must also explain why these professional groups have had a similar or even higher growth in pay. It seems more likely that a meaningful portion of the increase in CEO pay has been driven by market forces as well. (Kaplan 2012b, 21)
Bivens and Mishel (2013) address the larger issue of the role of CEO compensation in generating income gains at the very top and conclude that there are substantial rents embedded in executive pay, concluding that CEO pay gains are not simply the result of a competitive market for talent. We draw on that analysis to show that CEO compensation grew far faster than compensation of other highly paid workers over the last few decades, which suggests that the market for skills was not responsible for the rapid growth of CEO compensation. To reach this finding we employ Kaplan’s own series on CEO compensation and compare it to the incomes of top households, as he does, but also compare it to a better standard, the wages of top wage earners.4 This analysis finds, contrary to Kaplan, that compensation of CEOs has far outpaced that of other highly paid workers.
Table 2 presents the ratio of the average compensation of chief executive officers of large firms, the series developed by Kaplan, to two benchmarks. The first benchmark is the one Kaplan employs, the average household income of those in the top 0.1 percent developed by Piketty and Saez (2012). The second is the average annual earnings of the top 0.1 percent of wage earners based on a series developed by Kopczuk, Saez, and Song (2010) and updated in Mishel et al. (2012). Each ratio is presented as a simple ratio and logged (to convert to a “premium,” the relative pay differential between one group and another). The wage benchmark seems the most appropriate one since it avoids issues of household demographics—changes in two-earner couples, for instance—and limits the income to labor income (excluding capital income). Both the ratios and log ratios clearly understate the relative wage of CEOs since executive pay is a nontrivial share of the denominator, a bias that has probably grown over time simply because CEO relative pay has grown.5 For comparison purposes Table 2 also shows the changes in the gross (not regression-adjusted) college-high school wage premium.
Growth of relative CEO and college wages, 1979–2010
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CEO compensation grew from 1.14 times the income of the top 0.1 percent of households in 1989 to 2.06 times top 0.1 percent household income in 2010, Kaplan’s metric to measure CEO pay relative to that of other highly paid people. CEO pay relative to pay of top 0.1 percent wage earners grew even more, from 2.55 in 1989 to 4.70 in 2010, a rise (2.15) equal to the pay of more than two very high earners. The log ratio of CEO relative pay grew roughly 60 log points from 1989 to 2010 using either top household income or wage earners as the comparison.
Is this a large increase? Kaplan (2012a, 4) concluded that CEO relative pay “has remained relatively constant or declined.” Kaplan (2012b, 14) finds that the ratio “remains above its historical average and the level in the mid-1980s.” Figure D puts this in historical context by presenting the ratios displayed in Table 2 back to 1947. Kaplan’s ratio of CEO pay to top household incomes in 2010 (2.06) was nearly double the historical (1947–1979) average of 1.11, a relative gain roughly equivalent to the total income of a top 0.1 percent household. CEO pay relative to top wage earners in 2010 was 4.70 in 2010, 1.62 higher than the historical average of 3.08 (a relative gain of the wages earned by more than 1.6 high wage earners). As the data in Table 2 show, the increase in the logged CEO pay premium since 1979, and particularly since 1989, far exceeded the rise in the college-high school wage premium which is widely and appropriately considered substantial growth. The data would show an even faster growth of CEO relative pay if Kaplan had built his historical series using the Frydman and Saks (2010) series for the 1980–94 period rather than the Hall and Leibman data.6
Comparison of CEO compensation to top incomes and wages, 1947–2010
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Presumably, CEO relative pay has grown further since 2010. As Table 1 showed, between 2010 and 2012, CEO compensation (options-realized) rose 14.6 percent while estimated pay (options granted) fell 4.4 percent. It is noteworthy that Kaplan (2012b) argues that realized pay is the preferred measure of performance.7 Unfortunately, data on the earnings of top wage earners for 2012 are not yet available for a comparison to CEO compensation trends. However, CEO compensation grew faster than the wages of top 0.1 percent earners over 2010–11, with CEO compensation rising 1.6 percent (options realized) or 3.0 percent (options granted) and top 0.1 percent wages rising just 0.3 percent. If CEO pay growing far faster than that of other high earners is a test of the presence of rents, as Kaplan has suggested, then we would conclude that today’s executives receive substantial rents.
— Lawrence Mishel has been president of the Economic Policy Institute since 2002. Prior to that he was EPI’s first research director (starting in 1987) and later became vice president. He is the co-author of all 12 editions of The State of Working America . Él tiene un Ph. D. in economics from the University of Wisconsin-Madison, and his articles have appeared in a variety of academic and nonacademic journals. His areas of research are labor economics, wage and income distribution, industrial relations, productivity growth, and the economics of education.
— Natalie Sabadish is a research assistant at the Economic Policy Institute, providing support to EPI’s economists in a variety of policy areas. She also works with the Economic Analysis and Research Network (EARN), answering data-related inquiries and coordinating a nationwide internship program. She has previously interned at the Delaware Department of Labor and the Keystone Research Center. She has a B. S. in economics from the University of Delaware.
—The authors appreciate the Stephen Silberstein Foundation for support of research on executive compensation.
Endnotes
1. In 2007, according to the Capital IQ database, there were 38,824 executives in publicly held firms (tabulations kindly provided by Temple University professor Steve Balsam). There were 9,692 in the top 0.1 percent of wage earners.
2. The years chosen are based on data availability though where possible we chose cyclical peaks, years of low unemployment.
3. For instance, all of the papers prepared for the symposium on the top one percent, published in the Journal of Economic Perspectives (Summer 2013), used CEO pay measures with realized options. Bivens and Mishel (2013) follow this approach because the editors asked them to drop references to the options-granted measure.
4. We appreciate Steve Kaplan sharing his series with us.
5. Temple University professor Steve Balsam kindly provided tabulations of annual W-2 wages of executives in the top 0.1 percent from the Capital IQ database. The 9,692 executives in publicly owned firms that were in the top 0.1 percent of wage earners had average W-2 earnings of $4,400,028. Using Mishel et al. (2012) estimates of top 0.1 wages, executive wages make up 13.3 percent of total top 0.1 percent wages. One can gauge the bias of including executives in the denominator by noting that the ratio of executive wages to all top 0.1 percent wages in 2007 was 2.14 but the ratio of executive wages to non-executive wages was 2.32. Unfortunately, we do not have data that permit an assessment of the bias in 1979 or 1989. We also do not have information on the number and wages of executives in privately held firms: Their inclusion would clearly indicate an even larger bias. The IRS reports there were nearly 15,000 corporate tax returns in 2007 of firms with assets exceeding $250 million, indicating there are many more executives of large firms than just those in publicly held firms.
6. Kaplan (2012b, 14) notes that the Frydman and Saks series grew 289 percent, while the Hall and Leibman series grew 209 percent. He also notes that the Frydman and Saks series grows faster than that reported by Murphy (2012).
7. “Critics confuse estimated pay—what the boards give to the CEOs as estimated pay—and realized pay. The key question is whether CEOs who perform better earn more in realized pay.” (Kaplan 2012b, 22).
Referencias
Bivens, Josh, and Lawrence Mishel. 2013. The Pay of Corporate Executives and Financial Professionals as Evidence of Rents in Top 1 Percent Incomes . Economic Policy Institute Working Paper 296. http://www. epi. org/publication/pay-corporate-executives-financial-professionals/
Bebchuk, Lucian, and Jesse Fried. 2004. Pay Without Performance: The Unfulfilled Promise of Executive Remuneration . Cambridge, Mass. Harvard University Press. http://www. law. harvard. edu/faculty/bebchuk/pdfs/Performance-Part2.pdf
Bureau of Labor Statistics. Current Employment Statistics program. Public data series. Various years. Employment, Hours and Earnings-National [database]. http://www. bls. gov/ces/#data
Bureau of Economic Analysis (U. S. Department of Commerce). National Income and Product Accounts Tables [online data tables]. Various years. Tables 6.2C, 6.2D, 6.3C, and 6.3D. http://bea. gov/iTable/iTable. cfm? ReqID=9&step=1
Compustat. Various years. ExecuComp database [commercial database product accessible by purchase]. http://www. compustat. com/products. aspx? id=2147492873&terms=Execucomp
Federal Reserve Bank of St. Louis. Federal Reserve Economic Data (FRED) [database]. Various years. http://research. stlouisfed. org/fred2/
Frydman, Carola, and Raven E. Saks. 2010. “ Executive Compensation: A New View from a Long-Term Perspective, 1936-–2005.” Review of Financial Studies 23, 2099–2138.
Kaplan, Steven N. 2012a. “Executive Compensation and Corporate Governance in the U. S. Perceptions, Facts, and Challenges.” Martin Feldstein Lecture.
Kaplan, Steven N. 2012b. “Executive Compensation and Corporate Governance in the U. S. Perceptions, Facts and Challenges.” NBER Working Paper Series, number w18395. http://www. nber. org/papers/w18395
Kopczuk, Wojciech, Emmanuel Saez, and Jae Song. 2010. “Earnings Inequality and Mobility in the United States: Evidence from Social Security Data Since 1937.” The Quarterly Journal of Economics, vol. 125, no. 1: 91–128. http://qje. oxfordjournals. org/content/125/1/91.short
Mishel, Lawrence. 2013. “Working as Designed: High Profits and Stagnant Wages.” Working Economics (Economic Policy Institute blog). http://www. epi. org/blog/working-designed-high-profits-stagnant-wages/
Mishel, Lawrence, Josh Bivens, Elise Gould, and Heidi Shierholz. 2012. The State of Working America, 12th Edition . An Economic Policy Institute book. Ithaca, N. Y. Cornell University Press.
Mishel, Lawrence, and Natalie Sabadish. 2013. Methodology for Measuring CEO Compensation and the Ratio of CEO-to-Worker Compensation . Economic Policy Institute Working Paper #298. http://www. epi. org/publication/methodology-measuring-ceo-compensation-ratio/
Murphy, Kevin. 2012. The Politics of Pay: A Legislative History of Executive Compensation . University of Southern California Marshall School of Business Working Paper No. FBE 01.11.
Piketty, Thomas, and Emmanuel Saez. 2012. Tables and figures from “Income Inequality in the United States, 1913–1998,” Quarterly Journal of Economics . 118(1): 1-39, updated to 2010 in Excel format, March 2012. http://elsa. berkeley. edu/
Treasury Bond Futures and Options T-Bonds / T-Notes
The Cornerstone for Interest Rate Risk Management
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In today's ever-changing global economy, holding fixed-income securities is tantamount to speculating on the futures direction of interest rates. With the Treasury futures contracts at the Chicago Board of Trade and the MidAmerica Commodity Exchange, institutional and individual investors can help control the risk in holding fixed-income securities and help optimize their performance.
Whether market predictions call for rising or falling rates, you'll find that U. S. Treasury futures are an effective, low-cost way to help you meet your unique objectives. Read on to learn how they can benefit you.
Meeting the Needs of a Changing Marketplace
Interest rate futures were pioneered by the CBOT in 1975 in response to a growing market need for tools that could protect against sharp and frequent swings in the cost of money.
U. S. Treasury bond futures were first introduced, followed by futures on 10-year, 5-year, and 2-year U. S. Treasury notes. Over the past two decades, contract volume has grown to unprecedented levels, reflecting the growth of the underlying instruments and profound changes in the marketplace.
Today, CBOT Treasury futures are the most actively traded interest rate contracts in the world. Here are a few key reasons why you should consider trading these powerful risk management tools.
The CBOT offers futures on 2-year, 5-year, and 10-year U. S. Treasury notes and 30-year U. S. treasury bonds. Whether you're seeking to manage short, medium, or long-term risk, there is a contract that meets your needs.
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Counterparty credit risk is a major concern in today's marketplace. Trading at the CBOT is structured to protect all parties involved from that risk. Our own professional audit staff oversees the trading at the exchange. The Board of Trade Clearing Corporation provides a performance guarantee. And the Commodity Futures Trading Commission, whose primary function is to protect the integrity of the markets and its participants, regulates all U. S. futures markets. With these safeguards, counterparty credit risk is no longer an issue.
The prices of Treasury futures contracts are determined by open outcry in the designated trading pits, enabling you to receive the best prices available. These prices are global interest rate barometers, reflecting moves in national and international rates, and are available to the public immediately.
Because of CBOT Treasury bond and note futures respond to the same economic forces that affect cash fixed-income securities, you can use them to help control the risk of holding these securities as well as to improve returns.
How Treasury Futures Can Work for You
Regardless of your market outlook, U. S. Treasury bond and note futures are the ideal tools to help you adjust the risk/return characteristics of your fixed income securities. Here are some of the many risk-management opportunities they offer.
Lock in a Purchase Price
If you plan to purchase fixed-income securities in the futures and are concerned about the possibility of higher prices, you can buy Treasury futures and secure a maximum purchase price.
Preserve Investment Value
By selling Treasury futures, you can lock in an attractive selling price and protect the value of a portfolio or individual security against possible decreasing prices.
Cross-Hedge
U. S. Treasury bond and note futures can be used to control risk and enhance the returns of non-U. S. government securities. Treasury futures can be effective risk-management tools for corporate bonds, Eurobonds, and other fixed-income instruments.
Trade Changes in the Yield Curve
Because Treasury futures cover a wide spectrum of maturities from short-term notes to long-term bonds, you can construct trades based on the differences in interest rate movements all along the yield curve.
CME Treasury Bond Contract Specifications
Trading Unit
T-bond Futures - One U. S. Treasury bond with $100,000 face value at maturity.
10-year T-note Futures - One U. S. Treasury note with $100,000 face value at maturity.
5-year T-note Futures - One U. S. Treasury note with $100,000 face value at maturity.
2-year T-note Futures - One U. S. Treasury note with $200,000 face value at maturity.
Deliverable Grades
T-bond Futures - Bonds with at least 15 years remaining to maturity.
10-year T-note Futures - Notes with 61/2 to 10 years remaining to maturity.
5-year T-note Futures - Notes with 4 years 3 months to 5 years 3 months remaining to maturity.
2-year T-note Futures - Notes with 1 year 9 months to 2 years remaining to maturity.
Tick Size
T-bond Futures - 1/32
10-year T-note Futures - 1/32
5-year T-note Futures - 1/2 of 1/32
2-year T-note Futures - 1/4 of 1/32
Price Limit
T-bond Futures - 3 points, expandable to 41/2 points.
10-year T-note Futures - 3 points, expandable to 41/2 points.
5-year T-note Futures - 3 points, expandable to 41/2 points.
2-year T-note Futures - 1 point, expandable to 11/2 points.
Contract Months
T-bond Futures - March, June, September, December
10-year T-note Futures - March, June, September, December
5-year T-note Futures - March, June, September, December
2-year T-note Futures - March, June, September, December
Trading Hours
T-bond Futures - 7:20a. m. -2:00p. m. 2:30-4:30p. m. 5:20p. m.-8:05p. m. 10:30p. m.-6:00a. m.
10-yearT-note Futures - 7:20a. m. -2:00p. m. 2:30-4:30p. m. 5:20p. m. -8:05p. m. 10:30p. m. -6:00a. m.
5-year T-note Futures - 7:20a. m. -2:00p. m. 2:30-4:30p. m. 5:20p. m. -8:05p. m. 10:30p. m. -6:00a. m.
2-year T-note Futures - 7:20a. m. -2:00p. m. 2:30-4:30p. m. 5:20p. m. -8:05p. m. 10:30p. m. -6:00a. m.
Ticker Symbol
T-bond Futures - US
10-year T-note Futures - TY
5-year T-note Futures - FV
2-year T-note Futures - TU
Last Trading Day
T-bond Futures - Seventh business day preceding the last business day of the delivery month.
10-year T-note Futures - Seventh business day preceding the last business day of the delivery month
5-year T-note Futures - Seventh business day preceding the last business day of the delivery month.
2-year T-note Futures - The earlier of (1) the second business day prior to the issue day of the 2-year note auctioned in the current month, or (2) the last business
day of the calendar month.
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This page is designed for the sole purpose of teaching someone how to read financial statements. While intended for those with little or now knowledge of finacial statements, it can be a handy reminder even for the seasoned professional. This page is very long so an outline is provided to help you get the information you desire. (SEE OUTLINE) HOW TO READ A FINANCIAL STATEMENT If you are a certified public accountant it is most unlikely that you can learn anything from reading this book. You don't need to be told the basics of understanding what's presented in corporate annual reports. If you aren't a certified public accountant, and you find that annual reports are "over your head," this booklet can help you to grasp the facts contained in such reports and possibly become a better informed investor. That is our principal aim in publishing this booklet, but we also hope that it will be useful to other readers who want to understand how business works and to learn more about the companies that provide them with goods and services or that offer them employment.
Most annual reports can be broken down into three sections: the Executive Letter, the business Review, and the Financial Review. The Executive Letter gives a broad overview of the company's business and financial performance. The Business Review summarizes recent developments, trends, and objectives of the company. The Financial Review is where business performance is quantified in dollars. This is the section we intend to clarify.
The Financial Review has two major parts: Discussion and Analysis, and Audited Financial Statements. A third part might include information supplemental to the Financial Statements. In the Discussion and Analysis, management explains changes in operating results from year to year. This explanation is presented mainly in a narrative format, with charts and graphs highlighting the comparisons. The Operating results are numerically captured and presented in the Financial Statements.
The principal components of the Financial Statements are the balance sheet; income statement; statement of changes in shareholders' equity; statement of cash flows; and footnotes. The balance sheet portrays the financial strength of the company by showing what the company owns and what it owes on a certain date. The balance sheet can be thought of as a snapshot photograph since it reports on financial position as of the end of the year. The income statement, on the other hand, is like a motion picture since it reports on how the company performed during the year and shows whether operations have resulted in a profit or loss. The statement of changes in shareholders' equity reconciles the activity in the equity section of the balance sheet from year to year. Common changes in equity result from company profits or losses, dividends, or stock issuances. The statement of cash flows reports on the movement of cash by the company for the year. The footnotes provide more detailed information on the balance sheet and income statement.
This booklet will focus on illustrating the basic financial statements and footnotes presented in annual reports in accordance with current practice. It will also include examples of financial methods used by investors to better analyze financial statements. In order to provide a framework for illustration, we will invent a company. It will be a public company (one whose shares are freely traded on the open market). The reason for choosing a public company is that it is required to provide the most extensive amount of information in its annual reports in accordance with guidelines issued by the Securities and Exchange Commission (SEC). Our company will represent a typical corporation with the most commonly used accounting and reporting practices. We'll call our company Typical Manufacturing Company, Inc.
A Few Words Before We Begin
Below are four samples of a Balance Sheet, Income Statement, Statement of Changes in Shareholders' Equity, and a Statement of Cash Flows. These are the statements we will discuss in the first section. To simplify matters, we did not illustrate the Discussion and Analysis nor did we present examples of the Executive Letter or Business Review. In our sample statements, we've presented two years of financial results on the balance sheet and income statement and one year of activity on the statement of changes in shareholders' equity and statement of cash flows. This was also done for ease of illustration. Were we to comply with SEC requirements, we would have had to report the last three years of activity in the Income Statement, Statement of Changes in Shareholders' Equity, and Statement of Cash Flows. Further SEC requirements that we did not illustrate include: presentation of selected quarterly financial data for the past two years, business segment information for the last three years, a listing of company directors and executive officers, and the market price of the company's common stock for each quarterly period within the two most recent fiscal years.
Typical Manufacturing Company Inc. Consolidated Balance Sheet December 31,19X9 and 19X8 ( dollars in thousands )
Income tax payments totaled $3,000 in 19X9. Interest payments totaled $16,250 in, 19X9. See accompanying notes to consolidated financial statements.
The balance sheet represents the financial picture as it stood on one particular day, December 31, 19X9, as though the wheels of the company were momentarily at a standstill. Typical Manufacturing's balance sheet not only includes the most recent year, but also the previous year. This lets you compare how the company fared in its most recent years.
The balance sheet is divided into two sides: on the left are shown assets; on the right are shown liabilities and shareholders' equity. Both sides are always in balance. Each asset, liability, and component of shareholders' equity reported in the balance sheet represents an "account" having a dollar amount or "balance." In the assets column, we list all the goods and property owned, as well as claims against others yet to be collected. Under liabilities we list all debts due. Under shareholders' equity we list the amount shareholders would split up it Typical were liquidated at its balance sheet value.
Assume that the corporation goes out of business on the date of the balance sheet. If that occurs, the illustration which follows shows you what typical Manufacturing shareholders might expect to receive as their portion of the business.
Total assets (Less: intangibles)
Amount required to pay liabilities
Amount remaining for the shareholders
Now, we are going to give you a guided tour of the balance sheet's accounts. Bien. define each item, one by one, and explain how they work.
In general, current assets include cash and those assets which in the normal course of business will be turned into cash in the reasonably near future, i. e. generally within a year from the date of the balance sheet.
This is just what you would expect-bills and coins in the till (petty cash fund) and money on deposit in the bank.
This asset represents investment of excess or idle cash that is not needed immediately. In Typical's case it is invested in preferred stock. Because these funds may be needed on short notice, it is essential that the securities be readily marketable and subject to a minimum of price fluctuation. The general practice is to show marketable securities at cost or market, whichever is lower.
Marketable securities at cost which approximates mkt. value
Here we find the amount due from customers but not yet collected. When goods due are shipped prior to collection, a receivable is recorded. Customers are usually given 30,60, or 90 days in which to pay. The amount due from customers is $158,375. However, experience shows that some customers fail to pay their bills, because of financial difficulties or some catastrophic event (a tornado, a hurricane, or a flood) befalling their business. Therefore, in order to show the accounts receivable item at a figure representing expected receipts, the total is after a provision for doubtful accounts. This year that debt reserve was $2,375.
Accounts receivable-less allowance for doubtful accounts of $2,375
The inventory of a manufacturer is composed of three groups. raw materials to be used in the product, partially finished goods in process of manufacture, and finished goods ready for shipment to customers. The generally accepted method of valuation of the inventory is cost or market, whichever is lower. This gives a conservative figure. Where this method is used, the value for balance sheet purposes will be cost, or perhaps less than cost if, as a result of deterioration, obsolescence, decline in prices, or other factors, less than cost can be realized on the inventory. Inventory valuation includes an allocation of production and other expenses, as well as the cost of materials
Consolidated Balance Sheet December 31,19X9 and 19X8 ( dollars in thousands )
Prepaid expenses may arise for a situation such as this: During the year, Typical prepaid fire insurance Property, plant and equipment premiums and advertising charges for the next year. Those insurance premiums and advertising services are as yet unused at the balance sheet date, so there exists an unexpended item, which will be used up over the next 12 months. If the advance payments had not been made, the company would have more cash in the bank. So payments made in advance from which the company has not yet received benefits, but for which it will receive benefits next year, are listed among current assets as prepaid expenses.
Prepaid expenses and other current assets
Deferred charges for such items as the "introduction" of a new product to the market, or for moving a plant to a new location, represent a type of asset similar to pre-paid expenses. However, deferred charges are not included in current assets because the benefit from such expenditure will be reaped over several years to come. So the expenditure incurred will be gradually written off over the next several years, rather than fully charged off in the year payment is made. Our balance sheet shows no deferred charges because Typical has none. If it had, they would normally be included 'us' before intangibles on the asset side of the ledger.
To summarize, the total current assets item includes primarily: cash, marketable securities, accounts receivable, inventories, and prepaid expenses.
Total current assets
You will observe that these assets are mostly working assets in the sense that they are in a constant cycle of being converted into cash. Inventories, when sold become accounts receivable; receivables, upon collection, become cash; cash is used to pay debts and running expenses. We will discover later in the booklet how to make current assets tell a story.
Property, Plant, and Equipment
Property, plant and equipment represents those assets not intended for sale that are used over and over again in order to manufacture, display, warehouse, and transport the product. This category includes land, buildings, machinery, equipment, furniture, automobiles, and trucks. The generally accepted and approved method for valuation is cost minus the depreciation accumulated by the date of the balance sheet. Depreciation is discussed in the next section.
Property, plant, and equipment
The figure displayed is not intended to reflect market value at present or replacement cost in the future. While it is recognized that the cost to replace plant and equipment at some future date might be higher, that possible cost is obviously variable. For this reason, up to now, most companies have followed a general rule: acquisition cost less accumulated depreciation based on that cost.
Depreciation is the practice of allocating the cost of a fixed asset over its useful life. This has been defined for accounting purposes as the decline in useful value of a fixed asset due to wear and tear from use and passage of time.
The cost incurred to acquire the property, plant and equipment must be spread over the expected useful life, taking into consideration the factors discussed above. For example: Suppose a delivery truck costs $10,000 and is expected to last five years. Using a straight-line" method of depreciation, $2,000 of the truck's cost is allocated to each year's income statement. The balance sheet at the end of one year would show:
Less accumulated depreciation
Net depreciated value
At the end of the second year it would show:
Less accumulated depreciation
Net depreciated value
In our sample balance sheet, a figure is shown for accumulated depreciation. This amount is the total of accumulated depreciation for buildings, machinery, leasehold improvements, and furniture and fixtures. Land is not subject to depreciation, and its listed value remains unchanged from year to year.
Less accumulated depreciation
Thus, net property, plant and equipment is the valuation for balance sheet purposes of the investment in property, plant and equipment. As explained before, it consists of the cost of the various assets in this classification, less the depreciation accumulated to the date of the financial statement.
Net property, plant, and equipment
Depletion is a term used primarily by mining and oil companies or any of the so-called extractive industries. Since Typical Manufacturing is not in the mining business, we do not show depletion on the balance sheet. To deplete means to exhaust or use up. As the oil or other natural resource is used up or sold, a depletion reserve is set up to compensate for the natural wealth the company no longer owns.
These may be defined as assets having no physical existence, yet having substantial value to the company. ¿Ejemplos? A franchise to a cable TV company allowing exclusive service in certain areas, or a patent for exclusive manufacture of a specific article. It should be noted, however, that only intangibles purchased from other companies are shown on the balance sheet.
Another intangible asset sometimes found in corporate balance sheets is goodwill, which represents the amount by which the price of acquired companies exceeds the related values of net assets acquired. Company practices vary considerably in assigning value to this asset. Accounting rules now require one firm that buys another to write off the goodwill over a period not exceeding 40 years.
Intangibles (goodwill, patents)less amortization
All of these items added together produce the figure listed on the balance sheet as total assets.
This item generally includes all debts that fall due within 12 months. The current assets item is a companion to current liabilities because current assets are the source from which payments are made on current debts. The relationship between the two is one of the most revealing things to be learned from the balance sheet, and we will go into that later. For now, we need to define the subgroups within current liabilities.
Accounts payable The accounts payable item represents amounts the company owes to its regular business creditors from whom it has bought goods or services on open account.
If money is owed to a bank, individual, corporation, or other lender, it appears on the balance sheet under notes payable as evidence that a promissory note has been given by the borrower.
Accrued expenses Now we have defined accounts payable as the amounts owed by the company to its regular business creditors. The company also owes, on any given day, salaries and wages to its employees, interest on funds borrowed from banks and from bondholders, fees to attorneys, insurance premiums, pensions, and similar items. To the extent that the amounts owed and not recorded on the books are unpaid at the date of the balance sheet, these expenses are grouped as a total under accrued expenses.
The debt due to the various taxing authorities such as the Internal Revenue Service is the same as any other liability under accrued expenses. But because of the amount and the importance of the tax factor, it is generally stated separately as Income taxes payable.
Income taxes payable
Total current liabilities
In the matter of current liabilities, you will recall that we included debts due within one year from the balance sheet date. Here, under the heading of long-term liabilities are listed debts due after one year from the date of the financial report.
Deferred income taxes
One of the long-term liabilities on our sample balance sheet is deferred income taxes. The government provides businesses with tax incentives to make certain kinds of investments that will benefit the economy as a whole. Current and long-term debt are summed together to produce the figure listed on the balance sheet as liabilities. For instance, a company can take accelerated depreciation deductions for investments in plant and equipment. These rapid write-offs in the early years of investment reduce what the company would otherwise owe in current taxes, but at some point in the future the taxes must be paid. Companies include a charge for deferred taxes in their tax calculations on the income statement and show what taxes would be without the accelerated write-offs. That charge then accumulates as a long-term liability on the balance sheet.
Deferred income taxes
The other long-term liability on our balance sheet is 12.5% debentures due in 2010. The money was received by the company as a loan from the bond-holders, who in turn were given a certificate called a bond, as evidence of the loan. The bond is really a formal promissory note issued by the company, which in this case agreed to repay the debt at maturity in 2010 and also agreed to pay interest at the rate of 12.5% per year. Bond interest is usually payable semi-annually. Typical's bond issue is called a debenture because the bonds are backed by the general credit of the corporation rather than by the company's assets. Debentures are the most common type of bond issued by large, well-established corporations today.
Companies can also issue first mortgage bonds, which offer bondholder an added safeguard because they are secured by a mortgage on all or some of the company's property. First mortgage bonds are considered one of the highest grade investments because they give investors an undisputed claim on company earnings and the greatest safety. If the company is unable to pay off the bonds in cash when they are due, holders of first mortgage bonds have a claim or 1ien before other creditors (such as debenture holders) on the mortgaged assets, which may be sold and the proceeds used to satisfy the debt.
12.5% Debentures payable 2010
Other long-term debt includes all debt other than what is specifically reported on in the balance sheet. In the case of Typical, this debt was extinguished in 1989.
Foreign Currency Translation Adjustments When a company has an ownership interest in a foreign entity and the entity's results are to be captured in the company's consolidated financial statements, the financial statements of the foreign entity must be translated to U. S. dollars. Generally, the translation gain or loss should be reflected as a separate component of shareholders' equity called foreign currency translation adjustment. This adjustment should be distinguished from adjustments relating to transactions which are denominated in foreign currencies. The gain or loss in these cases should be included in a company's net income.
Foreign currency translation adjustments
When a company reacquires its own stock, it is reported as treasury stock and is deducted from shareholder's equity. Of the cost and par methods of accounting, the former method is more commonly applied to treasury stock. Under the cost method the cost of reacquired stock is deducted from share holders' equity. Any dividends on shares held in thetreasury should never be included as income.
The sum total of stock (net of treasury stock), additional paid-in capital, retained earnings and foreign currency translation adjustments, represents the total shareholder's equity.
If you consider yourself a conservative investor, you should invest only in companies that maintain a comfortable amount of working capital. A company's ability meet obligations, expand volume, and take advantage of opportunities is often determined by its working capital. Moreover, since you want your company to grow, this year's working capital should be larger than last year's.
What is a comfortable amount of working capital? Analysts use several methods to judge whether a company has a sound working capital position. To help you interpret the current position of a company in which you are considering investing, the current ratio is more helpful than the dollar total of working capital. The first rough test for an industrial company is to compare the current assets figure with the total current liabilities. A current ratio of 2 to1is generally considered adequate. This means that for each $1 of current liabilities, there should be $2 in current assets. To find the current ratio, divide current assets by current liabilities. In Typical's balance sheet:
Current assets $400,000 Current liabilities $170,000
= 2.35 or 2.35 to 1
Thus, for each $1 of current liabilities, there is $2.35 in current assets to back it up.
There are so many different kinds of companies, however, that this test requires a great deal of modification if it is to be really helpful in analyzing companies in different industries. Generally, companies that have a small inventory and easily collectible accounts receivable can operate safely with a lower current ratio than those companies having a greater proportion of their current assets in inventory and selling their products on credit.
How Quick is Quick?
In addition to net working capital and current ratio, there are other ways of testing the adequacy of the current position. What are quick assets? They're the assets you have to cover a sudden emergency, assets you could take right away to the bank, if you had to. They are those current assets that are quickly convertible into cash. This leaves out merchandise inventories, because such inventories have yet to be sold and are not convertible into cash. Accordingly, quick assets are current assets minus inventories and prepaid expenses.
$338,000,000 = $22.54 14,999,000 shares of preferred stock oustanding
Net book value per share of common stock
Do not be misled by book value figures, particularly of common stocks. Profitable companies often show a very low net book value and very sub - stantial earnings. Railroads, on the other hand, may show a high book value for their common stock but have such low or irregular earnings that the stock's market price is much less than its book value. Insurance companies, banks, and investment companies are exceptions. Because their assets are largely liquid (cash, accounts receivable, and marketable securities), the book value of their common stock is sometimes a fair indication of market value.
The proportion of each kind of security issued by a company is the capitalization ratio . A high propor-tion of bonds sometimes reduces the attractiveness of both the preferred and common stock, and too much preferred can detract from the common's value. That's because bond interest must be paid before preferred dividends, and preferred dividends before common dividends.
To get Typical's bond ratio divide the face value of the bonds, $130,000, by the total value of bonds, preferred and common stock, additional paid-in capital, retained earnings, foreign currency translation ad-justments and treasury stock, less intangibles, which is $474,000. This shows that bonds amount to about 27% of Typical's total capitalization.
The Income Statement (dollars in thousands except per-share amounts)
Now, we come to the payoff for many potential investors. the income statement. It shows how much the corporation earned or lost during the year. It appears earlier in this page (Go there now). While the balance sheet shows the fundamental soundness of a company by reflecting its financial position at a given date, the income statement may be of greater interest to investors because it shows the record of its operating activities for the whole year. It serves as a valuable guide in anticipating how the company may do in the future. The figure given for a single year is not nearly the whole story. The historical record for a series of years is more important than the figure of any single year. Typical includes two years in its statement and gives a ten-year financial summary as well, which appears further down this page (Go there now).
An income statement matches the amounts received from selling goods and services and other items of income against all the costs and outlays incurred in order to operate the company. The result is a net income or a net loss for the year. The costs incurred usually consist of cost of sales; overhead expenses such as wages and salaries, rent, supplies, depreciation; interest on money borrowed; and taxes.
The most important source of revenue always makes up the first item on the income statement. In Typical Manufacturing, it is net sales. It represents the primary source of money received by the company from its customers for goods sold or services rendered. The net sales item covers the amount received after taking into consideration returned goods and allowances for reduction of prices. By comparing 19X9 and 19X8, we can see if Typical had a better year in 19X9, or a worse one.
In a manufacturing establishment, this represents all the costs incurred in the factory in order to convert raw materials into finished products. These costs are commonly known as product costs. Product costs are those costs which can be identified with the purchase or manufacture of goods made available for sale. There are three basic components of product cost: direct materials; direct labor; and manufacturing overhead. Direct materials and direct labor costs can be directly traced to the finished product. For example, for a furniture manufacturer, lumber would be a direct material cost and carpenter wages would be a direct labor cost. Manufacturing overhead costs, while associated with the manufacturing process, cannot be traceable to the finished p roduct. Examples of manufacturing overhead costs are costs associated with operating the factory plant (plant depreciation, rent, electricity, supplies, maintenance and repairs, and production foremen salaries).
Gross Margin is the excess of sales over cost of sales, It represents the residual profit from sales after consid-ering product costs.
Income Before Extraordinary Loss
After we have taken into consideration all ordinary income (the plus factors) and deducted all ordinary costs (the minus factors), we arrive at income before extraordinary loss for the year.
Income before extraordinary loss
Under ordinary conditions, the above income of $52,750 would be the end of the story. However, there are years in which companies experience unusual and infrequent events called extraordinary items . Examples of extraordinary items include debt extinguishments, tax loss carry forwards, pension plan terminations, and litigation settlements. In this case, Typical extinguished a portion of its debt early. This event's isolated on a separate line, net of its tax effect. Its earnings-per-share impact is also segregated from the earnings per share attribut-able to"normal" operations.
Loss on early extinguishment of debt (net of tax benefit of $750)
Once all income and costs, including extraordinary items, are considered, we arrive at net income.
Two other items that do not apply to Typical could appear on an income statement. First, U. S. companies that do business overseas may have transaction gains or losses related to fluctuations in foreign currency exchange rates.
Second, if a corporation owns more than 20% but less than 51 % of the stock of a subsidiary company, the corporation must show its share of the subsidiary's earnings-minus any dividends received from the subsidiary on its income statement. For example, if the corporation's share of the subsidiary's earnings is $1,200 and the corporation received $700 in dividends from the company, the corporation must include $500 on its income statement under the category equity in the eamings of unconsolidated subsidiaries . The corporation must also increase its investment in the company to the extent of the earnings it picks up on its income statement.
Analyzing the Income Statement The income statement will tell us a lot more if we make a few detailed comparisons. Before you invest in a company, you want to know its operating margin of profit and how it has changed over the years. Typical had sales of $765,000,000 in 19X9 and showed $105,196,000 as the operating income.
$105,196 operating income $765,000 sales
This means that for each dollar of sales $0.1380 remained as a gross profit from operations. This figure is interesting but is more significant if we compare it with the profit margin last year.
$ 73,500 operating income $725,000 sales
Typical's profit margin went from 10.1 % to 13.8%, so business didn't just grow, it became more profitable . Changes in profit margin can reflect changes in efficiency, product line, or types of customers served.
We can also compare Typical with other companies in its field. If our company's profit margin is very low compared to others, it, is an unhealthy sign. If it is high, there are grounds for optimism.
Analysts also frequently use operating cost ratio for the same purpose. Operating cost ratio is the complement of the margin of profit. Typical's profit margin is 13.8%. The operating cost ratio is 86.2%. -
the long term, because they tell us about the fundamental economic condition of the company. One question remains: are the securities a good investment for you now? For an answer, we must look at some additional factors.
The bonds of Typical Manufacturing represent a very substantial debt, but they are due many years in the future. The yearly interest, however, is a fixed charge, and we want to know how readily the company can pay the interest. More specifically, we would like to know whether the borrowed funds have been put to good use so that the earnings are ample and thus available to meet interest costs.
The available income representing the source for payment of the bond interest is $110,446 (operating profit plus dividends and interest). The annual bond interest amounts to $16,250. This means the annual interest expense is covered 6.8 times.
$110,446 available income $16,250 interest on bonds
Before an industrial bond can be considered a safe investment, most analysts say that the company should earn its bond interest requirement three to four times over. By these standards, Typical Manufacturing has a fair margin of safety.
What About Leverage?
A stock is said to have high leverage if the company that issued it has a large proportion of bonds and preferred stock outstanding in relation to the amount of common stock. A simple illustration will show why. Let's take, for example, a company with $10,000,000 of 4% bonds outstanding. If the company is earning $440,000 before bond interest, there will only be $40,000 left for the common stock after payment of $400,000 bond interest ($10,000,000 at 4% equals $400,000). However, an increase of only 10% in earnings (to $484,000) will leave $84,000 for common stock dividends, or an increase of more than 100%. If there is only a small amount of common stock issued, the increase in earnings per share will appear very impressive.
You have probably realized that a decline of 10% in earnings would not only wipe out everything available for the common stock, but also result in the company's being unable to cover its full interest on its bonds without dipping into accumulated earnings. This is the great danger of so-called high-leverage stocks and also illustrates the fundamental weakness of companies that have a disproportionate amount of debt or preferred stock. Conservative investors usually steer clear of them, although these stocks do appeal to people who are willing to assume the risk.
Typical Manufacturing, on the other hand, is not a highly leveraged company. Last year, Typical paid $16,250 in bond interest and its net profit --before this payment -- came to $56,750. This left $40,500 for the common stock and retained earnings. Now look what happened this year, Net profit before subtracting bond interest rose by $7,250, or about 13%. Since the bond interest stayed the same, net income after paying this interest also rose $7,250, But that is about 18% of $40,500. While this is certainly not a spectacular example of leverage, 18% is better than 13%.
Preferred Dividend Coverage
To calculate the preferred dividend coverage (the number of times preferred dividends were earned), we must use net profit as our base, because federal, income taxes and all interest charges must be paid before anything is available for shareholders. Because we have 60,000 shares of $100 par value preferred stock that pays a dividend of $5.83 1/3, the total dividend requirement for the preferred stock is $350,000. Dividing the net income of $47,750,000 by this figure we arrive at approximately 136.4, which means that the dividend requirement of the preferred stock has been earned more than 136 times over. This ratio is so high partly because Typical has only a small amount of preferred stock outstanding.
Earnings Per Common Share
The buyer of common stock is often more concerned with the earnings per share of a stock than with the dividend. This is because earnings per share usually influence stock market prices. Although our income statement separates earnings per share before and after the effect of the extraordinary item, the remainder of our presentation will only consider earnings per share after the extraordinary item. In Typical's case the income statement shows earnings available for common stock.
Earnings per share
earnings available after preferred dividends number of outstanding common shares
= $3.16 earnings per share of common
Typical's capital structure is a very simple one, comprised of common and preferred stock. It's earnings-per-share computation will suffice under this scenario. However, if the capital structure is more complex and contains securities which are convertible into common stock, options, warrants or contingently issuable shares, the calculation requires modification. In fact, separate calculations must be performed. This is called dual presentation. The calculations are primary and fully diluted earnings per common share.
Primary Earnings Per Common Share
This is determined by dividing the earnings for the year not only by the number of shares of common stock outstanding but by the common stock plus common stock equivalents if dilutive .
Common stock equivalents are securities, such as convertible preferred stock, convertible bonds, stock options, warrants and the like, that enable the holder to become a common shareholder by exchanging or converting the security. These are deemed to be only one step short of common stock -- their value stems in large part from the value of the common to which they relate.
Convertible preferred stock and convertible bonds offer the holder either a specified dividend rate or interest return, or the option of participating in increased earnings on the common stock, through conversion. They don't have to be actually converted to common stock for these securities to be called a common stock equivalent. This is because they are in substance equivalent to common shares, enabling the holder at his discretion to cause an increase in the number of common shares by exchanging or converting. How do accountants determine a common stock equivalent? A convertible security is considered a common stock equivalent if its effective yield at the date of its issuance is less than two-thirds of the then-current average Aa corporate bond yield.
Now, let's put our new terms to work in an example, remembering that it has nothing to do with our own company, Typical Manufacturing. We start with the facts we have available. We'll say we have 100,000 shares of common stock outstanding plus another 100,000 shares of preferred stock, convertible into common on a share-for-share basis. (Assume they qualify as common stock equivalents.) We add the two and get 200,000 shares altogether. Now let's say our earnings figure is $500,000 for the year. With these facts, our primary computation is easy:
$500,000 earnings for the year 200,000 adjusted shares outstanding
= $2.50 primary earnings per share
However, as mentioned earlier, the common stock equivalent shares are only included in the computation if the effect of conversion on earnings per share is dilutive. Dilution occurs when earnings per share decrease or loss per share increases. For example, assume the preferred stock paid $3 a share in dividends. Without conversion, the earnings per share would be $2, as opposed to $2.50 per share, because net income available for common after payment of dividends would be $200,000 ($500,000 less $300,000) divided by the 100,000 common shares outstanding. In this case, the common stock equivalent shares would be excluded from the computation because conversion results in a higher earnings per share (anti-dilutive). Therefore, earnings per share of $2 will be reflected on the income statement.
Fully Diluted Earnings Per Common Share
The primary earnings per share item, as we have just seen in the preceding section, takes into consideration common stock and common stock equivalents. The purpose of fully diluted earnings per share is to reflect maximum potential dilution in earnings that would result if all contingent issuances of common stock had taken place at the beginning of the year.
This computation is the result of dividing the earnings for the year by: common stock and common stock equivalents and all other securities that are convertible (even though they do not qualify as common stock equivalents) .
How would it work? First, remember that we have 100,000 shares of convertible preferred outstanding, as well as our 100,000 in common. Now, let's say we also have convertible bonds with a par value of $10,000,000 outstanding. These bonds pay 6% interest and have a conversion ratio of 20 shares of common for every $1,000 bond. Assume the current average Aa corporate bond yield is 8%. These bonds are not common stock equivalents, because 6% is not less than two-thirds of 8%. However, for fully diluted earnings per share we have to count them in. If the 10,000 bonds were converted, we'd have another 200,000 shares of stock, so adding everything up gives us 400,000 shares. But by converting the bonds, we could skip the 6% interest payment, which gains us another $600,000 gross earnings. So our calculation looks like this:
Earnings for the year
$800,000 adjusted earnings 400,000 adjusted shares outstanding
= $2 fully diluted earnings per share
The only remaining step is to test for dilution. Earnings per share without bond conversion would be $2.50 ($500,000 divided by 200,000 shares). Since earnings per share of $2 is less than $2.50 we would assume debt conversion in our calculation of fully diluted earnings per share.
Both the price and the return on common stock vary with a multitude of factors, One such factor is the relationship that exists between the earnings per share and the market price. It is called the price-eamings ratio . and this is how it is calculated: If a stock is selling at 25 and earning $2 per share, its price-earnings ratio is 12 1/2 to 1, usually shortened to 12 1/2 and the stock is said to be selling at 12 1/2 times earnings. If the stock should rise to 40, the price-earnings ratio would be 20. Or, if the stock drops to 12, the price-earnings ratio would be 6.
In Typical Manufacturing, which has no convertible common stock equivalents, the earnings per share were calculated at $3.16. If the stock were selling at 33, the price-earnings ratio would be 10.4. This is the basic figure that you should use in viewing the record of this stock over a period of years and in comparing the common stock of this company with other similar stocks.
$33 market price $3.16 earnings per share
This means that Typical Manufacturing common stock is selling at approximately 10.4 times earnings.
Last year, Typical earned $2.77 per share. Let's say that its stock sold at the same price-earnings ratio then. This means that a share of Typical was selling for $28.80 or so, and anyone who bought Typical then would be satisfied now. Just remember, in the real world, investors can never be certain that any stock will keep its same price-earnings ratio from year to year. The historical P/E multiple is a guide, not a guarantee.
In general, a high P/E multiple, when compared with other companies in the same industry, means that investors have confidence in the company's ability to produce higher profits in the future.
Statement of Changes in Shareholders' Equity (dollars in thousands except per-share amounts)
This statement analyzes the changes from year to year in each shareholder's equity account. From this statement, we can see that during the year additional common stock was issued at a price above par. We can also see that Typical experienced a translation gain. The rest of the components of equity, with the exception of retained earnings which we discuss below, remained the same.
Just as the income statement reflects the payoff for shareholders, retained earnings reflects the payoff for the company itself. It shows how much money the company has plowed back into itself for new growth. The Statement of Changes shows that retained earn-ings increase by net income less dividends on pre-ferred and common stock. Since we have already analyzed net income, we will now analyze dividends.
Dividends on common stock vary with the profitability of the company. Common shareholders were paid $18,000 in dividends this year. Since we know from the balance sheet that Typical has 14,999,000 shares outstanding, the first thing we can learn here is what may be the most important point to some potential investors - dividends per share.
$18,000,000 common stock dividends 14,999,000 shares
Once we know the amount of dividends per share, we can easi ly discover the dividend payout ratio . This is Simply the percentage of net earnings per share that is paid to shareholders.
$1.20 dividend per common share $3.16 earnings per common share
Of course, the dividends on the $5.83 preferred stock will not change from year to year, The word cumulative in the balance statement description tells us that if Typical's management someday didn't pay a dividend on its preferred stock, then the $5.83 payment for that year would accumulate. It would have to be paid to preferred shareholders before any dividends could ever be declared again on the common stock.
That's why preferred stock is called preferred. It gets at any dividend money first. We've already talked about convertible bonds and convertible preferred stock. Right now, we're not interested in that aspect because Typical Manufacturing doesn't have any convertible securities outstanding. Chances are its 60,000 shares of preferred stock, with a par value of $100 each, were issued to family members of Mr. Isaiah Typical, who founded the company back in 1923. When he took Typical public, he didn't keep any of the common stock. In those days, the guaranteed $5.83 dividend was more important to Isaiah, He was not interested in taking any more chances on Typical.
During the year, Typical has added $29,400 to its retained earnings. Even if Typical has some lean years in the future, it has plenty of retained earnings from which to keep on declaring those $5.83 dividends on the preferred stock and $1.20 dividends on the com-mon stock.
There is one danger in having a lot of retained earnings. It could attract another company -- Shark Fast Foods & Electronics, for instance -- to buy up Typical's common stock to gain enough control to vote out the current management. Then Shark might merge Typical into itself. Where would Shark get the money to buy Typical stock? By issuing new shares of its own stock, perhaps. And where would Shark get the money to pay the dividends on all that new stock of its own? From Typical's retained earnings. So Typical's management has the obligation to its shareholders to make sure that its retained earnings are put to work to increase the total earnings per share of the shareholders. Or else, the shareholders might cooperate with Shark if and when it makes a raid.
Seeing how hard money works, of course, is one of the most popular measures that investors use to come up with individual judgments on how much they think a certain stock ought to be worth. The market itself-- the sum of all buyers and sellers-- makes the real decision. But the investors often try to make their own, in order to decide whether they want to invest at the market's price or wait. Most investors look for Typical's return on equity, which shows how hard shareholders' equity in Typical is working. In order to find Typical's current return on equity, we look at the balance sheet and take the common shareholders'equity for last year--not the current year--and then we see how much Typical made this year on it. We use only the amount of net profit after the dividends have been paid on the preferred stock. For Typical Manufacturing, that means $47,750 net profit minus $350. Esto es lo que obtenemos:
$47,750 net income - $350 preferred stock dividend $305,600 last year's stockholders' equity - $6,000 preferred stock value
Return on equity
For every dollar of shareholders' equity, Typical made more than $0.15. ¿Es bueno eso? Well, $0.158 on the dollar is better than Typical could have done by going out of business, taking its shareholders' equity and putting that $299,600 in the bank. So Typical obviously is better off in its own line of work. When we consider putting our money to work in Typical's stock, we should compare Typical's $0.158 not only to whatever Typical's business competitors make, but to Typical's investment competitors for our money. For instance, the latest available average rate for all U. S. industry, according to the U. S. Federal Trade Commission, was $0.16.
Just remember that $0.158 is what Typical itself makes on the dollar. By no means is it what you will make in dividends on Typical's stock. What that return on equity really tells you is whether Typical Manufacturing is relatively attractive as an enterprise, You can only hope that this attractiveness might be translated into demand for Typical stock, and be reflected in its price.
Many analysts also like to see a company's annual return on the total capital available to the company. To get this figure, we use all the equity, plus all available borrowed funds. This becomes the total capital available. And for the total return on this figure we use net income before income taxes and interest charges. This gives us a bigger capital base and a larger income figure. As shareholders, however, what we're most interested in is how hard our own share of the company is working, and that's why we are more interested in return on equity.
One more statement needs to be analyzed in order to get the full picture of Typical's financial status. The Statement of Cash Flows examines the changes in cash resulting from business activities. Cash-flow analysis is necessary in order to make proper investing decisions, as well as to maintain operations. Cash flows, although related to net income, are not equivalent, This is because of the accrual concept of accounting. Generally, under accrual accounting, a transaction is recognized on the income statement when the earnings process has been completed or an expense has been incurred. This does not necessarily coincide with the time that cash is exchanged. For example, cash received from merchandise sales often lags behind the time when goods are delivered to customers. However, the sale is recorded on the income statement when the goods are shipped.
Cash flows are separated by business activity. The business activity classifications presented on the statement include investing activities, financing activities, and operating activities. First, we will discuss financing and investing activities. Operating activities basically include all activities not classified as either financing or investing activities.
Financing activities include those activities relating to the generation and repayment of funds prvided by creditors and investors. These activities include the issuance of debt or equity securities and the repayment of debt and distribution of dividends. Investing activities include those activities relating to asset acquisition or disposal.
Operating activities involve activities relating to the production delivery of goods and services. They reflect the cash effects of transactions which are included in the determination of net income. Since many items enter into the determination of net income, the indirect method is used to determine the cash provided by or used for operating activities. This method requires adjusting net income to reconcile it to cash flows from operating activities. Common examples of cash flows from operating activities are interest received and paid, dividends received, salary, insurance, and tax payments.
Qualifying and Certifying
Watch Those Footnotes
The annual reports of many companies contain this statement: "The accompanying footnotes are an integral part of the finacial statements." The reason is that the finacial reports themselves are kept concise and condensed. Therefore, any explanatory matter that cannot readily be abbreviated is set out in greater detail in footnotes,
Some examples of approriate footnotes are:
Description of the company's policy for depreciation, amortization, consolidation, foreign currency translation, and earnings per share.
Inventory valuation method. This footnote indicates whether inventories shown on the blance sheet or used in determining the cost of goods sold on the income statement are valued on a last in, first out (LIFO) basis or a first in, first out (FIFO) basis. Last in, last out means that the cost on the income statement reflect the actual cost of inventories purchased most recently. First in, first out means the income statement reflects the cost of the oldest inventories. This is an extremely important consideration because a LIFO valuation reflects current costs and does not overstate profits during inflationary times while a FIFO vlauation does.
Changes in accounting policy as a result of new accounting rules.
Non-reccuring items such as pension-plan terminations or sales of significant business units.
Employment contracts, profit sharing, pension, and retirement plans.
Details of stock options granted to officers and employees.
Long-term leases. Companies which usually lease a considerable amount of selling space must show their lease liabilities on a per-year basis for the next several years and their total lease liabilities over a longer period of time.
Details relating to issuance and maturities of long-temr debt.
Contigent liabilities representing claims or lawsuits pending.
Commitments relating to contracts in force that will affect future periods.
Inflation accounting adjustments. Certain companies must show the impact if changing prices in their finacial position by adjusting items that appear on the balance sheet and the income statement for current costs and the Consumer Price Index. FASB Statement Number 89 spells out the requirements for presenting inflation adjusted fiancial data.
Separate breakdowns of sales and gross profits must be shown for each line of business that accounts for more than 20% of a companies sales. Multinational corporations must also show slaes and gross income on a geographic basis by country. Most people do not like to read footnotes because that may be complicated and almost always hard to read. This is unfortunate, because footnotes are very informative. Even if they don't reveal that the corporation has been forced into bankruptcy, footnotes can still reveal many fascinating sidelights of the finacial story.
The certificate from the independant auditors, which is printed inthe report, says, first, that the auditing steps taken in the process of verification of the account meet the accounting world's approved standards of practice; and second, that the finacial statements in the report have been prepared in conformity with generally accepted accounting principles (GAAP).
As a result, when the annual report contains finacial statements that have the stamp of approval from independant auditors, you have an assurance that the figures can be relied upon as having been fairly presented.
However, if the independent auditors accounts' opinion contains words such as "except for," or "subject to," the reader should investigate the reason behind such qualifications. Often the answer can be found by reading the footnotes that pertain to the matter. They are usually referred to in the auditors opinion.
We cannot emphasize too strongly that company records, in order to be very useful, must be compared. We can compare them to other company records, to industry averages or even to broader economic factors, if we want. But most of all, we can compare one company's annual activities to the same firm's results from other years.
This used to be done by keeping a file of old annual reports. Now, many corporations include a ten-year summary in their financial highlights each year. This provides the investing public with information about a decade of performance. That is why Typical Manufacturing included a ten-year summary in its annual report. It's not a part of the statements vouched for by the auditors, but it is there for you to see. A ten-year summary can show you:
The trend and consistency of sales
The trend of earnings, particularly in relation to sales and the economy
The trend of net earnings as a percentage of sales
The trend of return on equity
Net earnings per share of common
Dividends, and dividend policy.
Other companies may include changes in net worth, book value per share, capital expenditures for plant and machinery, long term debt, capital stock changes by way of stock dividends and splits, number of em-ployees, number of shareholders, number of outlets, and where appropriate, information on foreign subsidiaries and the extent to which foreign operations have been embodied in the financial report.
All of this is really important because of one central point: You are not only trying to find out how Typical is doing now . You want to predict how Typical will do, and how its stock will perform.
From the items we've studied in this booklet, Typical Manufacturing appears to be a healthy concern. Which should make Board Chairman Patience Typical, old Isaiah Typical's daughter, and her four nieces, who own most of the shares, happy. But it makes us rather sad, since Typical is fictional, and we can't offer you shares of its stock. When you decide to invest money In real stocks, please remember this: Selecting common stocks for investment requires careful study of factors other than those we can learn from financial statements. The economics of the country and the particular industry must be considered. The management of the company must be studied and its plans for the future assessed. Information about these other things is rarely in the financial report. These other facts must be gleaned from the press or the financial services or supplied by some research organizatlon. Merrill Lynch's Global Securities Research and Economics Group stands ready to help you get the available facts you need to be an intelligent Investor. Ask any Financial Consultant to put Merrill Lynch to work for you.
The 3 Best Stocks Under $10 Set to Double
Sometimes the stock market will punish a great company for no good reason, and send a stock below its fair value. Wouldn’t it be great if you could identify which stocks under $10 sold off without a good reason, so you could jump in and profit? Here are three stocks I think have done just that, and why you might see a 100% return from each.
Three Best Stocks Under $10
The legendary RAD stock has faced some difficult times. It took on a lot of debt years ago, as it swallowed up other smaller chains. Competition in the space has always been brutal, thanks to other companies like Walgreens (WAG). Competition sprang up in other unexpected places, as department stores like Target (TGT) moved into pharmacy products.
The internet has made it easy to purchase both pharmacy goods online, but also all the other things Rite-Aid sells.
All that competition can only result in bad news for RAD stock: the necessity to lower prices and survive on thinning margins.
The truth is there is nothing special about drugstores. They no longer offer anything that consumers can’t get elsewhere. They have been relegated to quasi-convenience stores.
As more and more people move to mail-order pharmacies, the walk-in business is being siphoned away.
Nevertheless, RAD stock has figured out how to turn its business around. It has shut down underperforming stores, remodeled other ones, and relocated still more. The company introduced a loyalty program called “Wellness” and it seems to be working.
Rite-Aid has also been aggressively moving into the generic drug distribution business. Its other initiatives have been paying off, as EBITDA has turned the corner. After falling several years in a row, it has been climbing steadily since 2011, growing from $859 million up to $1.32 billion.
EPS is set to double from FY13 to FY15, so it seems likely this stock under $10 may double also.
Fortress Investment Group (NYSE:FIG)
FIG stock is another stock under $10 that could double. This is a diversified investment management operation. It helps manage investments for pension plans, corporations, banks, charities, and municipalities.
It also manages hedge fund and private equity funds. Its expertise is broad, investing in all manner of distressed and undervalued assets from real estate to natural resources and even intellectual property.
FIG stock got badly hurt in the financial crisis and it has taken considerable time to recover. However, the company has turned around significantly as the capital markets improved. Cash flow from operations was a mere $168 million in FY11, but hit $433 million in FY13.
Despite all that happened in the financial crisis, insiders still own almost 37% of the stock, indicating their own faith in the company for the long term.
At $7 a share, and long-term analyst EPS projections of 52% growth, this stock under $10 could double.
The final stock under $10 that could double is from the burger world. The fast food burger chains have been undergoing significant changes. McDonald’s (MCD) has been struggling with inconsistent sales growth.
Burger King Worldwide (BKW) has executed a successful turnaround. Now, I believe Wendy’s will be the next successful turnaround story .
WEN stock launched a new concept, a remodeling initiative called Image Activation, giving the stores a more modern, minimalist feel. It is innovating its menu choices by offering premium items with higher quality ingredients, and launched a new advertising campaign. That helped quarterly earnings improve, with comps increasing 1.3% YOY. Adjusted EBITDA increased 13%.
The good news is WEN stock has $750 million in cash and $1.5 billion in inexpensive debt. It is free cash flow positive. Slow and steady will win this race, and the $8 stock should double.
Lawrence Meyers does not own shares in any security mentioned.
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Filing Details
Accession Number: 0000927089-16-000771 Form Type: 4/A Zero Holdings: No Publication Time: 2016-03-11 15:15:11 Reporting Period: 2015-11-17
Filing Date: 2016-03-11 Filing Date Changed: 2016-03-11 Accepted Time: 2016-03-11 15:15:11 Original Submission Date: 2015-11-30 SEC Url: Form 4 Filing
On September 8, 2015, the Issuer effected a 2-for-1 stock split. The number of shares reported throughout this Form 4 have been adjusted to reflect the stock split.
Includes 1,800 shares granted pursuant to the 2013 Stock Incentive Plan which reflect the unvested portion of a grant amount originally covering 3,000 shares (adjusted to reflect the stock split) that commenced vesting at a rate of 20% per year on May 8, 2014 and 35,346 shares held jointly with the reporting person's spouse.
In accordance with the terms of the stock option plan and stock incentive plan the exercise price of the options and number of shares subject to the option have been adjusted to reflect the stock split.
The options vested 20% per year in five equal annual installments beginning on May 14, 2009.
The options are vesting ratably over five years at 20% per year commencing on May 8, 2014.
Hedge Fund Resource Center
Te Mania provides buying options
This was a terrific result for the Gubbins and McFarlane families, achieving an increase of $1000 in top price from last year and an $818 lift in the average price.
Co-principal Tom Gubbins said: “While it was satisfying to see our genetics being purchased at top levels by successful stud and commercial herds that have such a strong focus on performance and consumer demands, it was also very pleasing to see commercial producers at all levels getting access to affordable genetics that still rank in the top percentiles of the breed.”
That top end saw 25 bulls exceed $10,000, including three over $20,000.
Top-priced bulls
The first major highlight was achieved just two lots in when the 762kg, 19 month-old Te Mania Kasbah K388 (AI) (ET) was offered. Sired by TC Aberdeen 759, this bull had top of breed rankings over many of its EBVs plus all four of the $ indices. An eye muscle area EBV of 12.3, 400 day weight of +95 and calving ease attributes for daughters at +3.2 and birth weight at just 1.9 were highlights.
Shane and Jodie Foster, Boonaroo Angus, Casterton, secured the bull for $23,000.
“Kasbah is also an ideal outcross for our herd, and he stood out with his frame, structural excellence and temperament, plus his data suggests he could have a huge impact on the industry,” Mr Foster said.
"We loved this bull for his incredible length and ability to carry muscle right through a strong topline and down through his hindquarter, while still retaining so much softness and do-ability. We feel he is the type of bull that can transform a herd; a real game changer,” Ms Foster said.
Pictured with Te Mania Kasbah K338, the $23,000 equal top priced bull at the Te Mania bull sale are Te Mania co-principals Hamish McFarlane (left), and Tom Gubbins (2nd right), and purchasers Jodie and Shane Foster, Boonaroo stud, Casterton.
It was not until lot 58 that the other equal top-priced bull was knocked down to Greg and Sally Chappell, Dulverton Angus, Glen Innes, NSW. Mr Chappell said Te Mania Kilkenny K912 (AI), sired by Te Mania Governor G576 (AI) ticked all the boxes of sound structure, temperament, calving ease and adequate growth.
“We were shopping around for another top sire with a focus on eating qualities, and the strength of this herd for carcase trait bulls is widely recognised,” Mr Chappell said.
“The success of this bull’s sire line gave us the confidence to travel down from Glen Innes.
“The added bonus was its dam is a Mittagong family cow and our first cow about 30 years ago was Te Mania Mittagong C65; so it was going back to our successful roots in a way while also gaining the performance levels of his outcross sire.”
Pictured with Te Mania Kilkenny K912, the other $23,000 equal top priced bull at the Te Mania bull sale are purchasers Greg and Sally Chappell, Dulverton Angus stud, Glen Innes, NSW and Te Mania co-principal Tom Gubbins.
Volume buyers
Sam Coulton, buying for his family trading as Morella Agriculture, Goondiwindi, Qld, was back in force at both the top end and volume buying stakes. He purchased 12 bulls, including four over $10,000 and averaged $9583 to be the highest individual bull buyer. Included was Te Mania Kingfield K1019 (AI) (ET) at $16,000, the other equal highest IMF scoring bull, also by Tuwharetoa Regent D145.
Balmoral Park, through Elders Yea were strong bidders in the top half, purchasing three outstanding bulls to $21,000 and averaging $16,333.Their top purchase, Te Mania Kelsey K565 (AI) (ET) and sired by Tuwharetoa Regent D145 had massive EBVs for growth up to +126 for 600 day weight, eye muscle at +7.3, and intramuscular fat at +4.0, the equal highest IMF in the catalogue.
On Auctions Plus 55 bidders logged in from around the country and were successful in purchasing 14 bulls at a $5429 average.
Cameron Hilton, Corcoran Parker, Wodonga, contributed strongly to the result with five clients who collectively purchased 20 bulls, average $5000 average.
“Our clients are looking at structure, IMF and 600 day weight in particular for steers to go into feedlots. They were all impressed with what was on offer,” Mr Hilton said.
Siblings John and Marisa Bergamin, Bergamin Pastoral Co, Willow Grove, and buying through Landmark Pakenham’s Peter Brewer were also strong bidders, purchasing four bulls, average $10,000.
4. Siblings John and Marisa Bergamin, Bergamin Pastoral Co, Willow Grove, Vic purchased strongly at the Te Mania bull sale, picking up four bulls to $11,000 and at a $10,000 average. They are pictured with two of their purchases in the background, their buying agent Peter Brewer (left), Landmark Pakenham, and Te Mania co-principal Hamish McFarlane (right).
Other prominent buyers included DJ Thompson Trust, Bellbrook, with six bulls to $12,000 and at a $9167 average, and the TRT Transport Group, through Elders Yea, who purchased five bulls to $14,000 and at an $8800 average.
Female sale
The Team Te Mania online commercial female sale was held the previous evening, with 540 of the 566 Angus females offered clearing. The sale offered high quality females from New England in NSW, throughout Victoria, and across to Tailem Bend in SA through Auctions Plus. The system continues to build momentum, with Te Mania reporting 3280 catalogue views for this sale and 58 bidders logged in to buy.
It was Knewleave Partnership, Queenscliffe, one of Team Te Mania’s highly regarded progeny testing herds that received the top price of $2220/head for 14 ACR registered 2.5 year-old cows with autumn calves at foot.
“This sale produced a very solid result and represented good value for both the vendors and purchasers,” co-principal Hamish McFarlane said.
How do I enter form 3921 into 2015 Turbotax Premier for ISO stock options sold in the same year and included and taxed on my W2?
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