Carl -
[...Where you want to test an alternative to the standard GAAP accounting would be in the simple cases, not the complex ones. ...]
OK
MONYTRE2.COM
Assume a company whose only asset is a tree whose leaves are $100 bills. It produces 10,000 leaves per year for a total of $1M. The company has a single employee, who is paid $200K per year. The company has 80K shares outstanding and the entire $800K annual net cash flow is paid out in dividends of $10 per share. The tree has a remaining life of 10 years and the interest rate is 0%. At the end of ten years, the company will have no remaining value. In each prior year, the value of the company will be equal to the total dividends remaining to be paid out. With ten years remaining the company value is $8M ($100/sh) and with
one year remaining the company value will be $800K ($10/sh).
As additional compensation, the single employee is given a one time upfront grant of 20K newly issued shares in the company, bringing the total shares to 100K. The entire unchanged $800K annual net cash flow is now paid out in dividends of $8 per share. ( $640K to the original shareholders and $160K to the new shareholder/employee ). The total company value at any time is the same as previously as the total dividend payouts are the same. ($8M with ten years remaining and $800K with one year remaining). Due to the higher share count, the per share value is now $80/sh with 10 years remaining and will be $8/sh with one year remaining.
How is the accounting profit determined, and what are the results, both with and without the additional share compensation?
Thanks, Don |
