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Politics : Ask Michael Burke
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To: Don Lloyd who wrote (68961)10/11/1999 10:43:00 PM
From: Freedom Fighter  Read Replies (1) of 132070
 
Don,

Thanks! You gave me a lot to think about.

When I was thinking about it a number of complicating issues came to mind. You touched on most of them. After about 1/2 hour of tossing them around I decided that I wasn't accomplishing much because I didn't have a clear answer. I think that's true of most valuations. Here's some of the things I considered.

The possibility that the extra diamond would come from inventory and not cause the company to mine it.

The possibility that the company would mine an extra diamond in order to meet the compensation requirement.

The possibility that the cost of mining an extra diamond would be lower than the average cost needed to meet market demand.

Should the cost of an extra diamond be allocated to cost of goods sold or SG&A and how would that effect the earnings statement.

The possibility that the company might continue to find new reserves.

I never considered the possibility that the company could "not" sell the 1000-1st diamond if it wanted too. I assumed there was a market for it. (this was a key assumption in the difference of our answers)

I never considered the possibility that the company might only sell 999 diamonds and use last one for compensation.

I understand the Austrian answer, but personally I would still value the company my way. The reason I feel that way is that I would assume that the extra diamond COULD be sold if the company desired, even if it required some incremental cost or was done at a lower price. That would have to be the case if the executive who received it could theoretically sell it.

If the company could theoretically have sold 1001 diamonds, it could have achieved a higher profit if it did not give the diamond to the executive.

If on the other hand 1000 is the most that the company could ever sell, then the executive's compensation would be meaningless until the company sold everything it had.

We could get into an extended back and forth based on the assumptions.

Wayne
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