Skeeter: re:< the actual cost of those diluted shares is hidden until the options are exercised so a company can, in effect, hide this cost of doing business and command a higher stock price than otherwise would exist at any given point in time.>
Your paranoid theory makes absolutely no sense. When a company issues new shares, capital is raised and expanded. When a company buys back its' shares, its' capital contracts. Companies do not have profits or losses when they raise capital or buy back their shares. There are no profits or losses (costs) to hide.
Moreover, if your assertion that "the shareholder is the company." were true, then why don't the companies you invest in require you to report your earnings to them for consolidation into their results ? Only the initial issuance of shares affects a company's net worth when assets flow (usually cash) into the company in exchange for new shares issued to those shareholders buying them. In the case of a stock option, cash only flows into the company when the employee exercises a stock option and the company receives the agreed option price ($10 in the example in my previous post) in exchange for issuing new shares to the employee. When the employee resells his shares ($10 cost basis) to another shareholder (at say at $50), that is a shareholder-to-shareholder transaction that has absolutely NOTHING to do with the company. Thus, the $40 profit to the employee is funded entirely by another shareholder, not the company. So all those profits Bill Gates has earned on his stock options are funded by OTHER SHAREHOLDERS willing to pay Gates increasingly higher amounts for the privilege of sharing in future Microsoft profits by buying shares from Gates which he purchased from Microsoft at an agree price (market value at the date of option grant) - such profits are NOT an expense of Microsoft since no Microsoft assets left the company to fund those profits. Follow the money, Skeeter, not the B.S. ! (and I don't mean Bachelor of Science).
Lastly, it IS TRUE in ALL cases (even for Microsoft) that average shares used for computing Diluted Earnings per Share include additional shares from the assumed exercise of ALL "in-the-money" outstanding stock options. Check it out for yourself in the footnotes to their 1997 financial statements in their annual report where the calculation of earnings per share is required to be detailed.
Many respected publications, including the New York Times (Floyd Norris) and Barons, have gotten the stock option expense issue wrong because these articles are written by journalists who obviously have a very superficial knowledge (at best) of accounting. It took an act of congress to stop this proposed accounting rule because even the members of the Financial Accounting Standards Board didn't understand the points described above. Just because it's in print, doesn't mean it's correct. Sorry to burst your bubble, Skeeter.
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