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Technology Stocks : Cisco Systems, Inc. (CSCO)

CSCO 78.16

+0.2%

Dec 26 9:30 AM EST

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To: The Phoenix who wrote (43162)	11/8/2000 9:57:50 PM
From: Stock Farmer	Read Replies (1) of 77400

Who do you believe? Company or Analysts... Ok. Let's take this at face value. In the CSCO 10-0K, amongst other things, they are legally required to compute and report an option compensation charge under SFAS-123. For those who don't know what this means, restating in the spirit of your post and the required disclosure, they have a "duty" to estimate the cash value of CSCO stock options, using a model that assumes (incorrectly) that they are normal unfettered equity options. Without getting down the rathole whether this option value should or shouldn't be reflected as a charge in earnings, we can infer a very important secondary fact! In providing an expected future value of an option where the average purchase price is known (average grant price is reported in 10K), Management is also providing us with their estimate of the expected future value of the stock price!! What do they present? All numbers below directly from 2000 10K. Estimated fair present value for options granted in FY2000 is $19.44. Average grant price in FY2000 was $52.10. In arriving at this estimated valuation, the company is required to make certain estimates and disclose the basis for the estimates. CSCO assumes that the option is fully exercised after 3.1 years and a risk free interest rate of 6.4% over this term. A bit of high-school algebra (inflate by 6.4% for 3.1 years) gives an estimated fair future value of an option in CSCO at $52 to be $23.57 in 2003 - for an implicit expected stock price of about $76 - or just a twiddle over 5.5% per year above inflation! All of this according to estimates that management has a "duty" to make and disclose. Now, those of us (yourself included) who are projecting CSCO's future value and explaining its business fortune are, in fact, armchair analysts. So we can restate your question. Who would you believe - the company that is duty/legally bound to provide accurate information to the shareholders, or [yourself]? John.

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