Review the Statements of Consolidated Income (page 40) and Note 12 – Stock Compe

Question

Review the Statements of Consolidated Income (page 40) and Note 12 – Stock Compensation (pages 67 – 68). Sherwin-Williams awards stock options as part of its compensation package for its employees. Current GAAP recognizes the value of the stock options at the time of grant as an expense and not at the time of exercise. Refer to the table at the top of page 68. As of December 31, 2016 there are 3,783,755 stock options exercisable with a weight average exercise price per share of $130.59. On December 31, 2016, Sherwin William’s share price was $268.74. What is the potential wealth transfer from existing shareholders to employees for the exercisable stock options as of December 31, 2016? Provide a numerical answer with supporting calculations.

Statements of Consolidated Income and Comprehensive Income (thousands of dollars except per common share data Year Ended December 31 2015 2016 2014 Net sales Cost of goods sold Gross profit $11,855,602 $11,339,304 $11,129,533 5,933,337 5,922,265 5,780,078 5,965,049 5,559,226 5,164,484 Percent to net sales 50.0% 49.0% 46.4% Selling, general and administrative expenses.······… 4,159,435 3,913,518 3,822,966 Percent to net sales 35.1 % 34.5% 34.3% Other general expense - net Impairment of goodwill and trademarks Interest expense ···· Interest and net investment income Other (income) expense - net Income before income taxes Income taxes . . Net income Net income per common share) 30,268 37,482 10,688 154,088 (4,960) . ·····.. . . . . . 61.791 (1,399) 6,082 1,548,966 495,117 64,205 (2,995) 15,400) 1,258,226 392,339 1,595,233 462,530 12.33 11.43 $11.99 11.15 $ Basic 9.00 Diluted 8.77 Presented under the treasury stock method. See Note 15 Year Ended December 31 2015 2016 2014 Net income Other comprehensive income (loss), net of tax: $1,132,703 $1,053,849 865,887 Foreign currency translation adjustments (18,648) (128,245) 103,441) Pension and other postretirement benefit adjustments: Amounts recognized in Other comprehensive loss) Amounts reclassified from Other comprehensive loss (28,385) 7,635 (20,750) (56,536) 8,980 (47,556) 5,847 13,821 .. Unrealized net gains (losses) on available-for-sale securities 1,046 89 1,135 Amounts recognized in Other comprehensive loss 366 Amounts reclassified from Other comprehensive losse.. 478 83 Unrealized net gains on cash flow hedges: Amounts recognized in Other comprehensive losse 85,007 (150,914) $ 714,973 46,744 Net of taxes of $17,200, $03,399) and $24,954, in 2016, 2015 and 2014, respectively. Net of taxes of $(4,691), $(1,647) and $(2,712), in 2016, 2015 and 2004, respectively. Net of taxes of $(643), $736 and $(228), in 2016, 2015 and 2014, respectively. Net of taxes of $(55), $(296) and $178 in 2016, 2015 and 2014, respectively. Net of taxes of $62,226) in 2016 2) See notes to consoidated financial statements 40

Explanation / Answer

The transfer of wealth represents a gain to the employees who are exercising the stock options and a loss to existing shareholders. This potential transfer of wealth is calculated as follows:-

Transfer of wealthfor exercisable stock options on December 31, 2016 = (Share Price-Exercise Price)*Stock options

= ($268.74 - $130.59)*3,783,755 = $522,725,753.25

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