Many companies grant certain members of management stock options that allow them to purchase designated amounts of

Question:

Many companies grant certain members of management stock options that allow them to purchase designated amounts of stock for less than its market price. These arrangements are referred to as stock compensation plans and are intended to help the company retain high-quality management and to en¬ courage management to increase the market value of the company’s stock.

Deciding on the appropriate way to account for these plans is complex and controversial. Therefore, companies are allowed to exclude the estimated costs of the options they grant their management from net earnings provided that they disclose the estimated costs in the footnotes to the financial statements.

Listed here are data from four different companies that grant stock options to members of their management. The data are based on information provided in the companies’ 10-K reports.

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Required:

a. Compute each company’s P/E ratio on July 1, 2003, based on (1) EPS as reported and (2) EPS with stock compensation deducted. You will have eight P/E ratios.

b. Assuming these companies are representative of their respective industries (department stores and software companies), what conclusions can you draw from the data provided and from your P/E computations? Write a brief report presenting your conclusions and the reasons for them.