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Technology Stocks : Wind River going up, up, up!
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To: Allen Benn who wrote (3430)7/20/1998 2:22:00 PM
From: Kevin Melia  Read Replies (1) of 10309
 
In this whole discussion on stock option valuation and how it should be accounted for, there are a few things that I can't grasp. Hopefully, someone can fill in the gaps.

The literature in the press seems to indicate that some companies are losing money because the intrinsic value of their employee options exceeds the annual earnings of that company and thus is diluting the value of the stockholders' investment.

1. The value of stock options is determined using Black-Scholes, which assumes perfect markets.
2. If the markets are perfect, then the value of the outstanding options has already been factored into the current valuation of the company as the information on the outstanding options has been made public.

Therefore, even if a company is losing money now, their expected future cash flows must at some point turn positive in excess of the stock option valuation in order to justify the current valuation. Furthermore, the current valuation must be accurate or else their would be an opportunity for short-sellers to make some money.

So what I don't get is why everyone is arguing over the EPS figure. What matters to me is that a company provides enough additional information so that I can recalculate the EPS if I don't agree with the method that they used to arrive at their number (e.g. I can subtract out what I think the charge should be for outstanding options). Am I missing something here?

Kevin
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