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Politics : Ask Michael Burke
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To: Don Lloyd who wrote (71111)11/29/1999 3:16:00 PM
From: Chuzzlewit  Read Replies (1) of 132070
 
Don,

It would likely surprise you for me to claim that simply giving the employee deferred payment stock would have the same characteristic of being essentially cost free to the company as a whole, as opposed to shareholders.

Yes it would. You have neglected to analyze the cost in terms of the WACC (weighted average cost of capital) which has a direct influence on the cost of raising new capital (debt or equity), which in turn determines the hurdle rate for new corporate investments. Thus, there is a cost to the company, because such issuance constrains its ability to grow. There is no free lunch. Issuing new shares raises the WACC.

Your analogy bothers me -- I believe it is flawed, although I cannot unequivocally find the flaw (but I will work on it). I suspect that it has to do with your use of slack for payment.

Is there any justification at all for a phantom expense to be entered on the company reports?

I think there is. That's why depreciation and amortization exist as expenses. And that's why goodwill exists as an asset. Conceptually, these items exist in order to match expenses (both real and imagined) with revenues (both real and imagined). Of course this depends upon management generating reasonable estimates (quite a leap of faith in many cases), which is one reason I rely much more heavily on cash flow statements. Another compelling reason for this approach is that the time value of money disappears in income statements.

TTFN,
CTC
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