CH 13 6. Employee stock ownership plans (ESOPs)

Why would a firm be willing to establish an employee stock ownership plan (ESOP)? Check all that apply.

• Employers are not required to match Social Security and Medicare taxes withheld from employees paychecks when the employees are part of an ESOP.
• It is common for financial institutions to loan money to ESOPs at below-market interest rates.
• Cash dividends paid on ESOP stock are tax deductible if the dividends are used to repay the loan that established the ESOP.

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 the companys cash balance?

• The companys cash balance will increase by $10 million at the end of these transactions.
• The companys cash balance will decrease by $10 million at the end of these transactions.
• The companys cash balance will be unchanged at the end of these transactions.