Question

6. 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:

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.	____________

Big T Burgers and Fries Corp. 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 Big T Burgers and Fries Corp. 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 company’s cash balance?

a) The company’s cash balance will decrease by $10 million at the end of these transactions.

b) he company’s cash balance will increase by $10 million at the end of these transactions.

c) The company’s cash balance will be unchanged at the end of these transactions.

Answer 1

Answer B is correct because both the selling of shares and acquiring of the loan will increase the cash balance and ESOP is created as security to opt loan

Answer Summary :

According to the IRS and department of labor, the ESOP can be kept as collateral security for acquiring the loan.

In the above scenario, we can see that Big T Burgers and Fries Corp signed a guarantee for the loan and kept ESOP as a collateral security

Answer A and C are incorrect because Due to ESOP tranasction the cash balance has increase