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Technology Stocks : Intel Corporation (INTC)
INTC 48.60+3.5%Jan 20 3:59 PM EST
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To: Charles Tutt who wrote (176296)12/29/2003 4:14:08 PM
From: Dave  Read Replies (1) of 186894
 
Charles:

You made a great point regarding stock options when you said what if a company decided to pay it's employees with stock thereby allowing the company to show no expenses.

At least in my very humble opinion, the uproar over stock options has been created since stock options have been *abused*. The upper echelons of management have personally enriched themselves often at their shareholders's expense. This is what is causing the uproar and furor over stock options.

For simplicitly sake, let's make some key assumptions.

A company trades at it's book value
A company had 10 shares outstanding

For starter's, the company has 10 shares outstanding and it's trading at "book value" ($10/share) which gives the company a market cap of $100.

In their most recent fiscal year, the company earned $20; therefore it's new books value is $120 or market price of $12 per share. (120/10)

Let's say that the company decided to issue a stock option to one of its employees. We'll ignore the ramifications of other employees feeling left out <ggg> at $10. By saving $10 (hey this is a "simplistic" example), the company reports Net Income of $30 and its adjusted Shareholder Equity is $130

It's market price would be (130/11) or 11.81 per share. Now assume that the company "re-purchased" this one share of stock at 11.81 thereby giving the company only 10 shares of stock. This would reduce its shareholder equity by 11.81 or to 130-11.81 = 118.19 or 11.81 per share. While the stock price is the same, think of the "economic" cost and loss of shareholder value that stock options create. This effect is only magnified when companies are trading at multiples of book value.

Sorry for the long message, but I personally believe that stock options should be used and are a cost of doing business. However, stock options have been abused and therefore stock options should be expensed.

Remember, while stock options expensing will affect a company's net income, it will not have any affect on a company's Cash Flow from Operations.
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