George Gilder - Forbes ASAP Message Board

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Technology Stocks : George Gilder - Forbes ASAP

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To: Charlie Smith who wrote (2442)	1/6/2000 11:25:00 PM
From: peter n matzke	Read Replies (1) of 5853

Charlie, my point was that the two items may not have any relationship to one another. I will make some gross over simplifications but look at the theory being presented. "authorized stock" are the number of shares allowed to issued by the corporation's charter "issued stock" are the number of shares issued to investors "outstanding shares" are the quantity currently available in public hands "treasury stock" is the number of outstanding shares that have been reacquired by the corporation, through purchase in the open market or by other means. Treasury stock can be held, reissued or retired, but is not considered outstanding stock. Mythical company "XYZ" which is trading at $10: XYZ has authorized stock of 100 million shares XYZ has issued stock of 80 million shares XYZ has outstanding stock of 80 million shares XYZ has treasury stock of 0 million shares issued = outstanding + treasury XYZ has earnings of 80 million in 1999 therefore earnings per share = $1 per share XYZ believes that its stock is below a fair value, so it goes into the market and buys 2 million shares In the real world this would probably cause the stock price to rise because of the demand for shares, but in this example we will stay in the mythical world and say that the price remains at a constant $10 per share. To pay for the buy back company XYZ has the choice to retire 2 million shares with earnings during 1999 or to issue to issue $20 million in bonds (long term debt) if XYZ uses earnings to buy back shares it will now have net earnings of $60 million on 78 million shares outstanding which gives and eps of $0.77 per share XYZ has authorized stock of 100 million shares XYZ has issued stock of 80 million shares XYZ has outstanding stock of 78 million shares XYZ has treasury stock of 2 million shares XYZ perceives that analysts will not respond favorably to earnings of $0.77 and also believes that long term rates are currently low. XYZ instead decides to issue $20 million in long term debt 7% 20 year bonds. Now while ignoring the cost of issuing the bonds the company still has earnings of $80 million on 78 million shares outstanding which gives and eps of $1.02 per share XYZ has authorized stock of 100 million shares XYZ has issued stock of 80 million shares XYZ has outstanding stock of 78 million shares XYZ has treasury stock of 2 million shares XYZ subsequently decides to service 2 million shares of the employee options program from treasury stock rather than going into the market to buy back more shares and without issuing any more authorized shares. XYZ has authorized stock of 100 million shares XYZ has issued stock of 80 million shares XYZ has outstanding stock of 80 million shares XYZ has treasury stock of 0 million shares eps is $1 per share in this example Its easy to draw an infinite number of scenarios but the point is that although each item has points in common with another item, one item is not necessarily the effect or result of another item. hope you find some value in the torturous explanation

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