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Technology Stocks : Cisco Systems, Inc. (CSCO)

CSCO 78.18

+0.2%

Dec 26 3:59 PM EST

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To: The Phoenix who wrote (44702)	12/17/2000 10:15:11 PM
From: Stock Farmer	Read Replies (1) of 77400

Gary - Your Q: How much tax savings benefit is actually a result of options exercises? A2Q: Look in 10K, cash flow statement, adjustments to reconcile... tax benefit of stock option exercise... 2.5 B$ in FY 2000. Also note additional 1.6 B$ in "financing activities" from sale of stock (this is primarily the sale of options to employees), stock options have a net cash impact of 4.1 B$ to CSCO. More in fact than the cash impact of operations! Your P: ""benefit the company gets from stock option exercises actually INCREASES as the stock price sags" NOT CORRECT: benefit to company DECREASES as stock price sags. Company grants an absolute number of options N at strike price S which will be vested and exercised over the next 9 years. Total cash value after all have been exercised will be ((N x S)) + (N x (P-S) x M) where P is the average price at exercise and M is the marginal tax rate. The first term represents the infusion of cash as employees pay for exercise, and the second term represents the tax benefit. You will see that the first term is independent of price, and that the second term goes up when average price at exercise goes up and down when average price goes down. One could argue price would play a part determining exercise. But this would be sophistry because facts (review of 10K) show differently. Approximately 20% of outstanding options are exercised in any given year, without much price sensitivity. So, stock price has a direct and material impact on tax benefit, which in turn has a direct and material impact on cash flows. Note 4.1 B$ positive contribution to cash flow. Compare this to 2.6 B$ worth of earnings from operations or 3.3 B$ worth of increase in cash & cash equivalents. Discounting impact of tax benefit from option exercise, YoY cash contribution from operating activities increased by only 5%! No mistake about it, CSCO's stock price is central to its ongoing operation. This time, bambs is correct. John.

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