First, company A will pay less tax then company B during the year of your example. Assuming a 30% tax rate, this brings back $30,000 of the missing free cash flow.
I would not agree with that Paul, although I could be wrong. My understanding is that one of the arguments that inspired the Levin/McCain bill is that companies are taking the "tax benefit for exercise of stock options" now, which presumably is a function of the expense determined by the difference between market and strike price at the time of exercise, even though the company does not report this expense on its income statements given to shareholders. So if this is the case, company B would get roughly equivalent tax treatment to company A in the long run, assuming that the actual value of the options turned out to be roughly $100,000 per engineer.
Company B's approach is more dilutive than Company A.
Ok, let's use a more extreme example to make my larger point: Let's say Company B grants the engineers options with a zero strike price and that they all vest and they all turn out to be worth exactly $100,000 per engineer per year. Now we have the exact same amount of shares being issued in both cases, but again, company B is perceived by the investing public to be much more profitable with regard to both net income and free cash flow than company A, yet the underlying economic activity is exactly the same.
I would like to discuss the per share data with you at a later time. Thanks for your comments.
Best, Huey |
