Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Employee Stock Options - NQSOs & ISOs -- Ignore unavailable to you. Want to Upgrade?

To: hueyone who wrote (69)	6/17/2002 8:54:29 AM
From: rkral	Respond to of 786

"I have never claimed that we should be deducting both [edit: ...] if that is what you are implying when you ask me where the second cost should be "added"." I wasn't trying to imply anything. I was just asking you to draw the value flow diagram. By "added", I meant "add to", or "clarify on" the diagram. Well. I sketched that diagram again .. and thought about it .. and discovered my own error in interpretation. I didn't consider the actual value of that exercised share of stock as it traveled from the company to the employee .. and then from the employee to "mr market". (Not literal travels of the stock, of course. I never saw the stock certificates for options I exercised.) I treated that share as if it had $0 value when delivered by the company .. and then, magically, had market value when sold to mr market. That viewpoint didn't make any difference to the employee net flows .. one share in, one share out .. no matter the value. (Not sure right now why I did that .. but a post-mortem is not important.) REVISED VIEWPOINT: The diagram is for value flows, due to option exercise of 1 share, market price = $70, exercise price = $10, company and employee tax rates both 33 1/3 percent. The value of the share delivered to the employee is $70. I sure see how people would interpret this as employee compensation expense to the company. But (thinking out loud here) .. there is no cash flow due to option exercise reported on GAAP statements .. the company just "prints" the stock (not considering stock repurchases here) .. only the government can print money (as JS pointed out) .. uncle sam's tax net of $0 would appear to be legitimized (which just doesn't seem right to me) .. afaik there is no FASB movement afoot to include this expense in financial statements. I can't resolve this in my own mind right now. Further thought, reading, and discussion seem to be required. >>"From the professor: However, even without using cash to repurchase shares there is a foregone cash inflow for the excess of the market price of the stock over the exercise price on the date of exercise."<< The professor is referring to the intrinsic value of the option .. the employee compensation .. on the exercise date. (There is minor potential source of confusion here. The "intrinsic value method" is a method to value an option grant. The term "intrinsic value" may be used for the option value upon exercise. Additionally, the term intrinsic value applies throughout the option's life. >>From the professor: "In fact, it is roughly the present value of this excess that a valuation model such as the Black-Scholes model attempts to estimate when assigning a value to stock options on the date of grant."<< This viewpoint, also espoused by John Shannon, is just incorrect imo. But it is difficult to prove a basic concept, especially when "complicated" math (calculus, statistical probability) is involved. But I don't think the above is necessarily the viewpoint of Charles Mulford of GA the Tech accounting professor. He was citing an argument that "is out there". As to that WSJ article you provided, I am disappointed. I am even more disappointed by the professor. During most of the interview, the professor merely parroted pro and con option arguments that are being discussed. Here was an opportunity for an authority in the accounting profession to present the real facts, or at least his interpretation of them, and and he recites existing arguments. The professor just blew it, imho. Aside: You used "deducting" in the opening quote of this post. Were you referring to the tax return? I may not be posting much today. Didn't get much sleep .. and I need to make some money. Wonder if I can just print some stock. <gg> Ron