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(Solved by Expert Tutors) Instructions1. Use the information regarding the transaction in 2008


from the case study and prepare the Shareholders' Equity section of the balance sheet for Moog, Inc. as at September 27, 2008. Please be specific in your response and follow the format we used in class. (Remember, you have to match the 2008 closing balances given in the consolidated shareholders' equity section, so there may be transactions happening behind the scenes.) Specifically, enter the following transaction into the Excel sheet we used in class:




a. In February 21, 2008, Moog completed the offering and sale of 2,875,000 shares of Class A common stock at a price of $31 per share. The net proceeds of $84,5 million were used to pay down outstanding credit facility borrowings. Remember, of $31 received per share, $1 (par value) goes into Common stock. In addition, the company only recognized the net proceeds (issue price minus par value minus broker fees in Additional Paid in Capital).
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b. Between 2007 and 2008 Moog converted Class B into Class A shares.


c. In July 2008, employees purchased 342,695 Class A shares from the company by exercising employee stock options. These shares had been previously purchased by the company in the open market at an average price of $5.33 per share. The 2007 sheet will help you to record this transaction. Remember, the strike price for the employee may be higher than $5.33. The difference - what the company receives from the employee - would be part of Additional Paid in Capital.


d. Moog reported net income of $81,345 million for the year. Remember the Retained Earnings (RE) equation from session 1: RE_1 = RE_0 + Net Income - Dividends).

2. In addition, the following transaction occurred in 2008 (see below). You don't need to enter these transactions into the Shareholders' Equity section, but you will have to write up your results and show me your computations. Please be short and sweet in your answers.
a. In March of 2008 the Board of Directors of Moog approved a four-for-three stock split of its Class A and Class B stock. This was a traditional stock split and not effected in the form of a stock dividend.


b. How does the stock split in b) affect the employee stock options? Please read the case study to find the answer. Is this good or bad for the employees?


c. In 2007 Moog purchases shares Class A for $29.70. In 2008 Moog sells all the shares it acquired in 2007 for $35. How would this sale affect the Shareholders' Equity section? Assume next that the intrinsic value of the shares is $40, would the difference between intrinsic value and stock price affect the Shareholders' Equity section?Is this a problem for existing shareholders, why/ why not?


d. Why would you retire a stock after you bought it back?


e. In February 2008 Moog granted 10,000 stock options issued at-the-money for its Class A shares to its employees that would vest in equal annual increments over a four-year period (5 years is the expected life of the option, so why am I highlighting this?) from the date of grant. Assume the grant price is $31, the life of the option is 10 years and as in prior years Moog pays no dividends. You will have to make an assumption regarding he risk-free rate and volatility. (You can "cheat" and pull up the 10-K from Moog Inc. and get the info from there. You can get the 10-K from www.sec.gov. Click on "search for company filing," click on "company fund or name," type in "Moog," click on the first link, and get filing date 11/27/2007.) Please derive the option value using the Black and Scholes option pricing formula and show the accounting effect of the option grant on the Shareholders' Equity section.


f. What would be your journal entry in a few years from now when everyone exercises their options? Assume the stock price is $60 then. The company didn't buy any shares back for these options in 2008!


g. The case mentions the Jimmy Fu is also awarded restricted stock of Class B stock. Can you see any accounting advantage of granting restricted stock over stock options? Footnote 1 in the case should help you get started in your thought process. Would you rather award restricted grants than options, why/ why not?

 


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