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Strategies & Market Trends : Bob Brinker: Market Savant & Radio Host
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To: kahunabear who wrote (5174)5/25/1998 7:40:00 AM
From: Boca_PETE  Read Replies (1) of 42834
 
WS: RE: <Forbes story asserts that the actual P/E for the S&P 500 would be 35 if employee stock option compensation was expensed.>

whipsaw, It took an act of congress to stop the issuance of a proposed rule that would have required companies to charge earnings with an expense for stock options. The reason companies protested the rule was that the rule made no sense. Assume you work for a fast growing company that issues you a stock option to buy its stock at $10 per share. After 2 years, the stock rises to $50 per share. You decide to exercise your option and give the company $10 in exchange for the share of its stock. At that point, you sell the share through your broker for $50. Thus, the company has not paid you the difference between your $10 cost and the $50 sale proceeds - another shareholder has paid you that profit. Therefore, how is it that the company should be required to charge its earnings with any portion of such profit - it's absurd because no company assets left the company -in fact assets came into the company when you bought the shares of $10. And that's why the proposal ultimately crashed and burned. Moreover, average shares used for computing Diluted Earnings per Share include additional shares from the assumed exercise of all "in-the-money" outstanding stock options.

My point IS, whatever the P/E is today, it would be interesting to know what the P/E would have been in 1961 (when it reached it's last record high of 22) under the accounting rules we use today.

P

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