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Employee stock ownership plans (ESOPs)
Indicate whether each of the following statements related to employee stock ownership plans (ESOPs) increases or decreases value for outside stockholders:
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ESOP Statements |
Value for Outside Stockholders |
|---|---|
| In theory, employees who have equity in a firm will be motivated to work harder and smarter. | |
| The creation of an ESOP is a form of additional compensation to employees. (Assume that the firm would have to provide this additional compensation in a different way if it did not create an ESOP.) | |
| Creating an ESOP can be a powerful tool in warding off takeovers. |
Rewriter Printers Inc. recently created an ESOP. The company issued 200,000 new shares of stock at $50 per share, which it sold to the ESOP. The ESOP borrowed $10 million to purchase the newly issued shares from the company. The financial institution was willing to lend the money to the ESOP, because Rewriter Printers Inc. signed a guarantee for the loan. The firm used the money from the ESOP to repurchase its shares on the open market at $50 per share.
Which of the following statements describes the net effect of these transactions on Rewriter Printers Inc.’s balance sheet?
The amount of the firm’s total liabilities and total shareholders’ equity will remain the same.
The firm’s total shareholders’ equity will increase by $10 million.
The firm’s total liabilities will increase by $10 million.
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