Intrinsic Value Model - Essay Example

June 17, 2006 Topic: Intrinsic Value Model a. How much should be reported as selling expense in each of the years d above, assuming that the company uses the intrinsic value modelAssuming that the company uses the intrinsic value model, the selling expense that should be reported is as follows:2002 - $72,000.00 2004 - $540,000.002005 - $990,000.00 b. Sanford is also considering other types of option plans. One such plan is a stock appreciation right (SAR) plan. What is a stock appreciation right plan What is a potential disadvantage of a SAR plan from the viewpoint of the companyA stock appreciation right (SAR) plan is a plan that allows an employee to receive a bonus on their stock purchases whenever a company's stock appreciates in value over a specified period of time.

Additionally, the employee is not required to pay the increases price of the stock, but the employees receives increased amount on the stock. A potential disadvantage of a stock appreciation right (SAR) plan from the viewpoint of the company is that, since the employees are not required to pay the increased amount for their stock, the company will essentially be crediting the employee money at the expense of the company. For example, an employee gains 75 shares of stock at $5.00 per share.

The employee has $375.00 worth of company stock. However, in a stock appreciation right (SAR) plan, if the company's stock increases to $10.00 per share, the employee is not required to pay the extra $5.00 per share for his 75 shares of stock. However, the employee will still gain $5.00 more per share for each of his 75 shares of stock. The employee will, then, have $750.00 worth of company stock instead of the $350.00 worth of company stock. The employee gains $400.00 at the company's expense because they were part of a stock appreciation right (SAR) plan.

Works Cited:The Rudd Report - Investment News and Research. June 17, 2006. http://www.ruddreport.com/intrinsic_value.htmStock Appreciation Right - SAR. June 17, 2006.http://www.investopedia.com/terms/s/sar.asp