>>No, I don't want to go through the Black Scholes calculation.<<
Darn! I could have saved myself a lot of work. Just kidding. I was going to do that sooner or later anyway. BTW the standard Black-Scholes calculator works for MSFT FY01 too .. $29.31 reported versus $29.35 calculated.
>>I wish to see how it is reported via SFAS 123.<<
That's tough to explain .. especially for me, since I just now read (part of) Appendix B of FAS 123 for the first time. Recommend you buy FAS 123 .. only $13.50 at order.store.yahoo.com
>>this compensation cost is recognized ratably over the vesting period. What does the ratably comment mean? Is it a straight line breakdown over the model's expected life estimate?<<
I'm not sure what "ratably" means .. although it seems to be a common term in accounting. But, in any case, the amortization ends up being quasi-exponential. Let me try to explain with this example.
An option for 4 shares is granted with a vesting schedule of 25% (1 share) after 1 yr, and an additional 25% each year until 100% vested. The option life and, therefore, the option cost is estimated to be the same for all option shares at $24 per share.
The total option cost for THIS grant for the 1st year is $50 [$24*(1 + 1/2 + 1/3 + 1/4)], for the 2nd is $26 [$24*(1/2 + 1/3 + 1/4)], for the 3rd is $14 [$24*(1/3 + 1/4)] and , for the 4th is $6 [$24*(1/4)]. (Check: $50+$26+$14+$6 = 4*$24 = $96) Of course, the option value could be any other value.
Now those amortized amounts are only for the options granted in one year. Amortized amounts from both preceding and succeeding years must also be included to get a true yearly total. (And Standard & Poors wants to do this every quarter with their "Core Earnings" accounting.)
>>... weighted grant price $79.87 plus Black Scholes value of $36.67 ...<<
Not sure why you want to add the prices. Are you comparing to someone having bought a call on the open market .. and then coughing up the exercise price? Good thought .. but it's not quite the same here .. since the employee didn't pay for the option.
Yes, those FY2000 options are underwater, but I see nothing unfair about it.
>>What about companies like JDSU? Do you think the Black Scholes method is costing their options realistically?<<
I don't follow JDSU .. but I took a quick look at their assumptions for the Black-Scholes valuation. In my UNQUALIFIED opinion, I think JDSU needs to reconsider their method in estimating volatility .. since it is probably the biggest cause of the call option being valued at 78% of the stock price. That ratio seems ridiculous to me.
If your company asks you whether you want, for free, *an option for 100 shares of stock OR 78 shares of stock*, which would you choose? (Biomaven, I know that was your point to me. Thanks.)
>>What about SEBL? Their year 2000 grants have a weighted average value of $60.49. The Black Scholes model values those grants at $34.37. The expected life at the time of grant is 3.4 years. I don't expect that SEBL's stock price will reach $94.87 ( the Black Scholes assumption) in the remaining life of those grants.<<
The option life of 3.4 years is just the value plugged into the Black-Scholes equation to determine the option value. The actual expiration of the options is in 2010 .. plenty of time for options to come back above water IMHO. Ditto for lots of other employee stock options right now.
>>The problem as I see it with Black Scholes, is that it isn't flexible enough to re-evaluate option values when the markets decline after bubble valuations.<<
I have no problem with that. That's just the nature of options. The employees presumably accepted a lower dollar compensation (than they might have obtained at companies not offering options) in order to have a chance at the golden ring of option compensation. Do you think these employees should get the upside potential from options without any downside risk?
>>The enormous amounts of out-of-the-money options in tech land are still being charged as expenses in the SFAS 123 footnote for their remaining expected life from the original grant assumptions.<<
I believe the saying is ... "crap happens". And I see no substantial difference between options being underwater while they're still being amortized than say .. say plant and equipment being depreciated over 30 years, which then goes obsolete after 12 years. Do you?
In both cases, we found ourselves unable to predict the future.
Ron |
