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General Miller Case Study

In: Business and Management

Submitted By wenyong619
Words 991
Pages 4
1. When shares of common stock are issued to satisfy the exercise of employee stock options, are the shares issued from the Company’s “authorized but previously unissued shares” or from the Company’s “treasury stock”? Where in the financial statements do you find this information?

(page 44) According to the 10-K, the Company’s common stock remains the same in 2011 and 2010 (75.5 million) while the treasury stock increased from 2615.2 to 3210.3 million, which means the Company didn’t issue any “authorized but previously unissued shares” this year but satisfied the exercise of employee stock options by using the treasury stock they bought in fiscal year 2011.

2. Based on the assumptions used for the Black-Scholes option-pricing model as disclosed in the notes to the financial statements, as well as the market price of the stock on the last day of fiscal years 2011 and 2010, determine whether the change in value of each assumption (and stock price) between 2010 and 2011 positively or negatively impacts the estimated fair value of the options granted during 2011.

(page 33) As disclosed in General Mills’ 10-K, the market price of the stock on the last day of fiscal years 2011 and 2010 are $37.38 and $27.99, respectively, while the estimated fair value of stock options in 2011 and 2010 are $4.12 and $3.20, respectively. The increased market price can be a strong supporter to the increased estimated fair value. Then the change in value of each assumption in Black-Scholes option-pricing model can affect the estimated fair value in different direction:
1) Risk-free interest rate decreased from 3.7% to 2.9%, which negatively affect the estimated fair value of the stock options
2) Expected term remains the same in 2011 and 2010. It didn’t impact the estimated fair value.
3) Expected volatility decreased from 18.9% to 18.5%. As we know, if the volatility of the

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