OT ... Lizzie, re "my position all along has been that options cause dilution only ... "
You are wrong IMHO. Consider the following scenario.
A company acts like a covered call writer. It buys 1000 shares of its own stock at $10 (all $ are per share), and simultaneously grants 1000 option shares to its (collective) employee at an exercise price of $10. Using an acceptable option valuation model, the fair value is determined to be $4.
Some time later, the employee exercises the option for 1000 shares when the stock is $25. The covered call position is now closed. The number of shares is exactly the same as before the covered call position was opened. Therefore, due to this option grant and exercise, the number of shares outstanding is unchanged. There is no anti-dilution, and there is no dilution.
But does no dilution mean there was no expense? The FASB says the expense is $4. John Shannon and mindmeld say the expense should be $15, I think. Huey would probably accept either number, as long as the darned options get expensed.
But you say "options cause dilution only". IOW, you say options expense is $0. Since your position is at the extreme, and at $0, don't you think your position is the most likely one to be incorrect? More likely incorrect than $15? Even more likely incorrect than $4?
I personally agree with the $4 FASB number.
And then what's the $11 difference between the FASB number and the Shannon/mindmeld number? It is unrealized capital gain to the employee, IMHO.
If the employee had purchased the $10 option for $4 on an option exchange, exercised the option, and sold the stock for $25, the employee would have a capital gain of $11. The ESO should be no different.
Regards, Ron |
