Question

Please answer the following. If correct, I will make sure to thumbs up. Thank you!

5. Employee stock ownership plans (ESOPs) Aa Aa Why would a firm be willing to establish an employee stock ownership plan (ESOP)? Check all that apply. Cash dividends paid on ESOP stock are tax deductible if the dividends are used to repay the loan that established the ESOP. Employers are not required to match Social Security and Medicare taxes withheld from employees' paychecks when the employees are part of an ESOP. It is common for financial institutions to loan money to ESOPs at below-market interest rates. Chilly Moose Fruit Producer 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 Chilly Moose Fruit Producer 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 Chilly Moose Fruit Producer's balance sheet? O The amount of the firm's total liabilities and total shareholders' equity will remain the same. O The firm's total liabilities will increase by $10 million. O The firm's total shareholders' equity will increase by $10 million.

Answer 1

5). Option 1 and 3 are correct.

Cash dividends paid on ESOP stock are tax deductible if the dividends are used to repay the loan that established the ESOP.

Financial institutions loan money to ESOPs at below-market rates because if the ESOP owns 50% or more of common stock, the lenders can exclude 50% of the interest received on the loan, from taxable income. This improves their returns which makes them willing to lend to ESOPs at lower rates.

6). The firm's total shareholder's equity will increase by $10 million as the loan credit will be balanced out by the cash debit.