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Free Cash Flows Problem

Now FASB required that all employee stock options should be expensed on income statement. On Jan. 2005, AA company granted total $100,000 (fair value) of stock options to the employee. The exercise price is equal to the market price at the grant time. The employees cannot exercise the options until 2007. According to the new requirement, the company should record an expense $50,000 for 2005 and $50,000 for 2006. During 2008, all options are exercised. What is the effect on the free cash flows for 2005?

A. decrease
B. not determinable
C. increase
D. no effect

Solution Preview

A. decrease

Several items are deducted from free cash flow, which include interest, taxes, capital spending, and dividends to preferred stockholders. Free cash ...

Solution Summary

This solution explains the effect on free cash flows for 2005 for AA company.