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To: A.L. Reagan who wrote (52177)	7/17/2002 10:34:07 PM
From: paul_philp	Read Replies (2) \| Respond to of 54805

Pandora's box or not I think that you have your facts wrong but I am not certain, which is why I asked for a link. I read a study that showed FCF and earnings are much more corelated than any one year picture would indicate. At the end of nine innings FCF = GAAP earnings or the balance sheets dont balance. Would you pay the same for a guaranteed flow of cash payments as you would for an uncertain stream of GAAP earnings, the reinvestment decisions for which are made by corporate officers and boards beyond your control? Of course not, you'd pay less for the uncertain stream. I think you are correct except for the very long term where the S&P earnings and treasury risk profiles become similar. There are wide local variations in the S&P earnings but the very long term picture is quite consistent. Paul

To: A.L. Reagan who wrote (52177)	7/18/2002 10:03:55 AM
From: hueyone	Read Replies (1) \| Respond to of 54805

re: Free Cash Flow On a "per share" basis, in order to compare apples to apples, if a firm elects not to expense stock options (Pandora's box #2), then the cash used to purchase treasury shares in order to maintain a constant number of shares issued and outstanding must necessarily be deducted from free cash flow. Thank you for your comments. It has bothered me a great deal that a company who goes out and sells shares on the open market, and then compensates its employees out of those proceeds would show considerably less net income as well as less free cash flow than a company who grants options for the same shares to employees, and then allows the employees to exercise the options and collect the money directly from shareholders---even though the underlying activities are economic equivalents. I think your adjusted free cash flow calculation would take care of this problem by more or less reducing the free cash flow in example number two to that of example number one. With regard to calculating free cash flow when options are expensed versus calculating free cash flow when options are not expensed, a lot of folks have argued that the free cash flow number is the same number in either instance. However, these folks may have too high a free cash flow number to begin with in both instances. Though earnings are reduced by the non cash option expense when options are expensed, when calculating free cash flow, these folks presumably add this non cash charge back to net income in the section titled "Adjustments to Reconcile Net Income to Net Cash provided by Operating Activities" when figuring their free cash flow number. If we are truly looking for a free cash flow number that is representative of "the residue left over for the common shareholder after the enterprise has replenished any 'wasting' assets (PP&E, intellectual property, etc.) necessary to more or less sustain its productive capacity to generate cash flow" (excellent definition by the way), then these folks free cash flow number in both instances is not representative of that definition we are looking for. Therefore in the event that options are not expensed, perhaps as you say, we should be deducting from free cash flow the amount it would take to offset dilution by repurchasing shares. When options are expensed, we probably should not add the non cash options charge back in to our final free cash flow number like we do with depreciation and amortization. Would you agree? Thanks again for your comments. Best regards, Huey