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Technology Stocks : Cisco Systems, Inc. (CSCO) -- Ignore unavailable to you. Want to Upgrade?

To: Wyätt Gwyön who wrote (47595)	1/30/2001 10:30:37 PM
From: Adam Nash	Read Replies (1) \| Respond to of 77400

Your points are all valid, but there is a fundamental problem in using Black-Scholes to value employee options contracts, at least as compensation expense. The problem is that Black-Scholes assumes a zero-sum standard European contract. However, the fact the Cisco does not "buy" equity to fulfill the contract, but just issues it, means that really Cisco is not experiencing an expense in the traditional sense of the word. Instead, Cisco is issuing equity at below-market prices. Thus, the potential expense for the contract is based on opportunity cost, not any real cash expense, present or future. This is an expense when it happens, ie, at exercise, but to account for it at issuance would be using opportunity cost as the basis of the expense. Your position certainly is accepted, and even prevelant amond many CPAs. However, the issue is far from clear, and in my opinion, currently accounted for correctly by the expenses at exercise and the dilution figures that are provided these days.