Bob Brinker: Market Savant & Radio Host Message Board

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Strategies & Market Trends : Bob Brinker: Market Savant & Radio Host

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To: Skeeter Bug who wrote (5193)	5/27/1998 7:02:00 AM
From: Boca_PETE	Read Replies (2) of 42834

Skeeter: re: < companies issue options and then buy back stock. they don't do it with monopoly money.> Company grants of stock options to employees have a Zero cash impact on the company and net worth, except that cash that might have been paid out out as compensation can now be invested in more profitable capital projects to generate future profits for the company. In a completely different type of transaction when companies buy back their own stock, net worth contracts because such companies must pay for such repurchased stock at prevailing market prices as of the day of repurchase. They must pay for such repurchased shares with company cash, not monopoly money. If they tried to pay with monopoly money, the broker would resell those repurchased shares just like the broker would act if you or I tried to pay for shares we buy with monopoly money. Companies reduce their net worth by the cost of such repurchased shares (known as Treasury Stock). When such treasury shares are reissued, capital expands because cash flows into the company for the price they are sold for. Sometimes Treasury shares are the shares igven to employees that exercise their options in exchange for cash payment to the company for the agreed option price. The difference between the cost of those treasury shares and the price such employees pay for the shares is added to the "Paid-in Capital" account. These ARE the realities. It's your choice to see devious intent in these types of transactions. I guess since the publication of Andy Grove's book, it's fashionable to try hard to be suspious of just about everything. I think Brinker's intent behind mentioning the book on MoneyTalk was to only warn investors to be cautious about current stock market valuations, especially in areas that trade at sky high P/E's, not to encourage a consiracy mindset about audited information companies report. P

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