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To: Simba who wrote (16495)	8/13/2002 3:25:10 AM
From: Math Junkie	Respond to of 42834

Suppose the company granted employee stock options equal to the total shares outstanding. If 100% of those options were eventually exercised, then either the stock price would go lower than it otherwise would have, or the P/E ratio would be doubled, permanently. To say that a long term buy-and-holder would not be affected by the dilution is simply false.

To: Simba who wrote (16495)	8/13/2002 3:48:53 AM
From: Don Lloyd	Respond to of 42834

Simba, <Your claim about the shareholder not suffering a cash cost from dilution until he sells may be right in a narrow, literal sense, but not in terms of economic reality. > It is clear that the long-term buy-and-holder does not suffer any cash costs nor does the company when options exercised. Cash cost is simply a shorthand for people who cannot or will not understand economic reality and logic. Every existing shareholder suffers an immediate and substantial mark-to-market-loss at the instant of dilution. The company income statement should properly and completely reflect that dilution, but nothing more. The mark-to-market-loss from dilution is exactly and completely the source of benefit to the employee. You need to be careful to avoid confusing current income and expenses with investment gains over an uncertain future. If the stock price goes up while an employee is holding stock, he has an investment gain that is not a current or even a deferred loss or expense to the company or its shareholders, who have merely changed their risk allocation profile to be less sensitive to stock price rises or falls. To think otherwise would permanently attach every stock purchase and sale to the entire future stock price trajectory forever. Regards, Don