Employee stock ownership plans (ESOPs) Why would a firm be willing to establish an employee stock ownership plan (ESOP)?
A. It is common for financial institutions to loan money to ESOPs at below-market interest rates.
B. Employers are not required to match Social Security and Medicare taxes withheld from employees' paychecks when the employees are part of an ESOP.
C. Cash dividends paid on ESOP stock are tax deductible if the dividends are used to repay the loan that established the ESOP.
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. How will Big T Burgers and Fries Corp.'s guarantee of the $10 million loan be reflected on the company's balance sheet?
A. The company will increase its total liabilities by $10 million.
B. The company will increase its cash balance by $10 million.
C. The company's guarantee of the loan is considered an off-balance sheet liability of $10 million.