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

To: rkral who wrote (117)	6/23/2002 10:52:47 AM
From: Exacctnt	Read Replies (1) \| Respond to of 786

<<<Ugh .. as in ugly. You really don't want to step through the calculation by hand. While the option value is expressed as the sum of two terms, each term involves exponentials and normal probability distribution functions. And calculating the individual terms provides no insight.>>> No, I don't want to go through the Black Scholes calculation. I wish to see how it is reported via SFAS 123. I've noticed in MSFT's case their Form 10-K says that Under SFAS 123, employee stock options are valued at grant date using the Black-Scholes valuation model, and this compensation cost is recognized ratably over the vesting period. What does the ratably comment mean? Is it a straight line breakdown over the model's expected life estimate? Are options that are exercised/cancelled dropped out in future period calculations? From what the Form 10-K discloses for most companies, there are four pieces of information given. The weighted average Black Scholes value of options granted, a weighted average expected life, volatility, and risk-free-interest rates. The important numbers as far as recociling reporting via SFAS 123 versus GAAP are the Black Scholes value of options granted and the expected life. The numbers disclosed when applied to real companies porvide valuation assumptions that trouble me. Under Black Scholes, MSFT has the year 2000 grants valued at $36.67, that calculation assumed that MSFT's stock price will be at $116.54 (weighted grant price $79.87 plus Black Scholes value of $36.67) within 6.2 years at the time of grant. That was two years ago. Is this realistic? Maybe. What about SEBL? Their year 2000 grants have a weighted average value of $60.49. The Black Scholes model values those grants at $34.37. The expected life at the time of grant is 3.4 years. I don't expect that SEBL's stock price will reach $94.87 ( the Black Scoles assumption) in the remaining life of those grants. What about companies like JDSU? Do you think the Black Scholes method is costing their options realistically? The problem as I see it with Black Scholes, is that it isn't flexible enough to re-evaluate option values when the markets decline after bubble valuations. The enormous amounts of out-of-the-money options in tech land are still being charged as expenses in the SFAS 123 footnote for their remaining expected life from the original grant assumptions.