2. Sam Jones is the president of Apollo Finance, a payday lender. The company’s

Question

2. Sam Jones is the president of Apollo Finance, a payday lender. The company’s proxy statement contains the following description of Mr. Jones’ pay package. Mr. Jones is eligible for an annual incentive bonus equal to 1% Net Income of the company and is eligible for an additional bonus upon annual increases in Net EPS only after earnings exceed 15% over the prior year. The additional bonus is determined as follows:
EPS Growth Additional Bonus
EPS increases up to 14.9% $0
EPS increases of 15% to 24.9% 2% of the earnings increase from the prior year
EPS increases of 25% to 34.9% 3% of the earnings increase from the prior year
EPS increases above 35% 4% of the earnings increase from the prior year

Assume no change in the number of shares of outstanding stock during the year.

A. Suppose that Apollo Finance had $75 million of Net Income for the year. How much of a bonus would Mr.Jones receive if the EPS increase for the year was 12%?
B. B. Suppose that Apollo Finance had $75 million of Net Income for the year. How much of a bonus would Mr. Jones receive if the EPS increase for the year was 28%

Explanation / Answer

A. Apollo finance net income = $75 million Annual incentive bonus      = 1% of net income                                          = 0.01 x $75,000,000 So annual incentive bonus = $750,000 Additional bonus upon EPS increase of 12% = $0 B. Net income for ther year = $75 million Increase in EPS              = 28% So annual incentive bonus = $750,000 Additional bonus upon EPS increase of 28% = 3% of net income So additional bonus (3% x 75 million)            = 0.03 x $75,000,000 Additional bonus upon increase in EPS of 28% = $2,250,000

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