Hi Thorr, BEKlein; About the value of those options that
DELL gives employees...
The 9 cent correction to earnings is obtained by
computing the fair market value of the options at
the time of grant. This value is computed using
the option theory of Black-Scholes (sp), and seems
a fair way to account for them.
In order to destroy a major portion of DELL's earnings,
we would have to value the options at their value
when exercised. But that is not predictable at the
time of grant. So if accountants tried to use that
idea, they wouldn't know what costs this year's
production would have until this year's options were
exercised - as much as 10 years from now. This
is clearly not the proper way to account for options.
Another way of looking at it is to see that at the time
DELL makes an option grant, the employee receives
a gift. That gift increases (or decreases) in value with
time. Thus the employee becomes an investor. As an
investor, the gains are therefore not automatically
subtracted from the company earnings.
DELL buys back shares for several reasons, one
of which is to prevent the float from increasing due
to option exercise, therefore you can't simply
subtract costs spent on stock from earnings. For
instance, cash-flow in a lot of companies is more
than earnings, so such a company can buy more
stock back than they earn. This is not a sign of
an unprofitable company. Nor is a company that
lets the number of shares increase obviously losing
money. In fact, options exercise, like secondary
offerings, increase the amount of cash in the
company. Secondary offerings are sometimes
made by profitable companies in order to obtain
funds to expand faster.
The real problem with DELL is in the future. Look
for further, much more radical drops in their ASP,
in my opinion.
Today ought to be pretty exciting for day traders.
Best of luck! I've found it to be very useful in the
stock market, and intend on using my portion today!
-- Carl |
