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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Don Lloyd who wrote (83166)	8/21/2000 3:59:08 AM
From: Bilow	Read Replies (1) \| Respond to of 132070

Hi Don Lloyd; Actually, the 1-year increase in profits were not "real", because they were due only to what was effectively the sale of their own stock to employees. That is, companies are not allowed to show cash from sale of their stock as "profit". It is a part of cash flow, but not profit. The one-year increase in dividends was paid by the dilution, and did not amount to a sudden 33% improvement in profitability of the company. That there was no sudden improvement in profitability is made clear by (1) that I specifically eliminated that possibility from the example, and (2) that there was no change in the net present value of the dividend stream. If there had been an extra $1 produced, then the net present value would have to have been increased by $1, as well. Re the employment compensation through stock assignment to the guard (or whatever). Clearly the first example is one of a company making both a cash profit and earnings of $8 per share. Easily agreed. In the second case, the $200K of cash compensation is reduced to compensation of 20K shares. Since you did not give a price for the shares, it is not possible to compute the new compensation cost. I will choose to value the company using npv with interest at 5%. Since the company produces $800K per year, that means the total value of the company is $800K/0.05 = $16 million. Since the guard is given stock for 1/5th of the company (i.e. 20K shares out of a total of 20K+80K = 100K), the value of his compensation is shown on the books as $16Million / 5 = $3.2 Million. You did not specify how long the stock was to pay for employment. If his employment with the company is to last 8 years, then the value of his stock compensation per year would be $400K per year. This applies whether the stock price goes up, down or stays the same. This means that the near term earnings for the company will be reduced to $600K per year, rather than the $800K it was originally. Re the third case (which is a vague situation involving twins and misrepresentation or fraud). It seems that instead of trying to illustrate your point, you are only trying to obfuscate the issue. If you really can't distinguish between "cash flow" and "profit", then admit it, and go pick up a book on the subject of accounting, like I did 15 years ago. -- Carl