Good Investment Theses: VALUATIONS w/ FUNDAMENTAL ANALYSIS Message Board

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Strategies & Market Trends : Good Investment Theses: VALUATIONS w/ FUNDAMENTAL ANALYSIS

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To: Edwarda who wrote (58)	4/24/1999 4:09:00 PM
From: Chuzzlewit	Read Replies (3) of 160

Okay, down to brass tacks. The effect of a stock option (forget handcuffs etc for the moment) is to dilute shareholder equity. Foe example (purely hypothetical), suppose we have a company with a capitalized value of $5BB, with 100MM shares o/s. Each share is selling for $50. Now suppose the company issues 1MM shares as part of an options deal, and charges employees $10. So now the value of the company has increased to 5.010BB with 101MM shares o/s. The value of each share has fallen to 5.010/101 = $49.604. To avoid dilution, the company would need to spend $49,604,000 for share repurchase. That is an expense to shareholders. Can we agree on that before proceeding further? I like when you scratch my ears. CTC

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