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Technology Stocks : Cisco Systems, Inc. (CSCO)

CSCO 76.22

+0.1%

Nov 24 3:59 PM EST

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To: Dave who wrote (47526)	1/30/2001 3:54:27 PM
From: Adam Nash	Read Replies (1) of 77400

The reason Cisco benefits is largely taxes. When employees cash in options that are in the money, the gain is recorded on their W-2s as income. They end up paying personal income taxes on the gains at the end of the year. Since this gain is recorded as compensation, Cisco accounts a compensation expense, which lowers taxable income for the year. Thus, there are a number of benefits: cash flow benefits because the gain was not paid by Cisco, it was paid by the person who purchased the stock from the employee. Cisco is also receiving cash flow from the employees in exchange for the equity. Cisco also accrues real tax-shield benefits from the compensation expense. I believe in FY 2000, these tax benefits accounted for over $2.5B. That's off the top of my head, though. You can find it in the cash flow statement from the annual report. The tax benefit is accounted for in the operating cash flow, while the cash flow from the sale of equity is in the financing cash flow. The only downside to this is that Cisco is opportunity cost: Cisco is issuing equity at below market prices. However, this is accounted for in the dilution statistics for the stock, represented by lower FCF/share. However, there is real value being created here by lowering tax liability.

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