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Technology Stocks : Cisco Systems, Inc. (CSCO)
CSCO 77.78+1.2%3:59 PM EST
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To: Don Lloyd who wrote (64601)9/15/2003 8:56:03 PM
From: RetiredNow  Read Replies (1) of 77400
 
Don, if what you say is true, that "the value of the granted stock or options to the company is not difficult to calculate at all, because it is PRECISELY ZERO", then why wouldn't a company issue stock options and shares to suppliers and employees ad infinitum?

I'll tell you why. Because the company would become watered stock and no investor would touch the company with a ten foot pole. At that point, the company would no longer be able to pursue any form of equity financing whether it's through share issuance to primary and secondary markets or whether it's through indirect equity financing through issuance of stock options.

What then? Stockholders would unload as much of the company's shares as possible until the company is delisted. Then the company would only survive in so far as it's ability to generate working capital from cash flows from operations or from debt financing.

Take it a step further, for anyone trained in finance, it's an intricate balancing act to get the right balance of equity and debt financing to ensure that you are squeezing the maximum return on invested capital out of your company. If a corporate finance department let the above scenario play out, they'd end up with a company that was highly inefficient at generating a return on investment and they should be fired. I don't know of any trained financial professionals who would recommend the kind of dilution that can play out through excessive equity financing and stock options issuance.
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