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.

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

To: hueyone who wrote (60811)	8/7/2002 11:17:11 AM
From: RetiredNow	Respond to of 77397

Wow. That's a serious flaw in the Black Sholes accounting methodology. No wonder companies are balking at it. I like mark to market ideas better.

To: hueyone who wrote (60811)	8/7/2002 12:06:17 PM
From: aladin	Read Replies (1) \| Respond to of 77397

Hueyone, That is the big flaw in this so called accounting for options. I can just see the Senate hearings and 'true-believers' castigating a Bill Gates or John Chambers. Senator: How Sir do you explain your __ billion in cash - when your financial statements show you losing money (and avoiding taxes as a result)? So how does a Cisco or Microsoft account for its cash generation while all these 'expenses' are losing them money? On that note - how much tax revenue would need to be returned to these companies if they went back and restated their earnings for the past 5 years with this method? Of course this method is perfect in hindsight - we know what the options are worth now. The Catch-22 of course is that with option expensing the stock would not grow as much - so an entirely new model for predicting future prices would be needed. This isn't depreciation - where you are simply arguing over the time frame for an asset to reach zero - Black Scholes attempts to predict the future. Extremely difficult with emerging companies in new areas. Have you actually looked at the Black Scholes paper or at the math? It assumes the following: 1) The stock pays no dividends during the option's life 2) European exercise terms are used 3) Markets are efficient 4) No commissions are charged 5) Interest rates remain constant and known 6) Returns are lognormally distributed Now perhaps this works in evaluating options on Berkshire or Coke :-) Maybe some other method would be more appropriate. Expensing the real differential at exercise? John