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To: Clarksterh who wrote (125848)	12/5/2002 8:59:02 AM
From: Wyätt Gwyön	Read Replies (1) \| Respond to of 152472

And the price of the stock would be deterministically $0, making the price of the options also zero. not true. but i give you extra credit for using that fancy word "deterministically" in place of a logical argument. now, instead of presenting a rebuttal consisting of another fancy word (i was thinking of "asymptotic"--that seems more along the lines of what you meant), allow me to resort to a critique of pure reason: if you have a 1% ownership share of a company worth $100, then your share is worth $1. if the value of the company increases to $300 but you are diluted 50% (0.5% ownership share), your share is worth $1.50. hence one can conceive of an option which would profit on this 50% increase in the underlying share price. this option will have a positive value. A rhetorical question since I am not really interested in rehashing. this does not surprise me--why would you want to lose the same argument twice? here is how i took apart your argument some months ago. #reply-17489375 To:Clark Hare who wrote (118983) From: Mucho Maas Sunday, May 19, 2002 10:13 PM View Replies (2) \| Respond to of 125853 no one seems to want to address my two points: i will be happy to address them... 1) To count options in the earnings and in the diluted shares in EPS is double booking. not at all. if you use the Black-Scholes cost of options as an expense reflecting the value of option at time of issuance, that covers the option expense. what is important to understand here is that the thing being expensed by the co is the market value (according to Black-Scholes) of the options at time of issuance. what they are "giving away" is an option--not a share. double booking would be if you diluted EPS twice. but the dilution happens only once (as share count increases). meanwhile the expense of the option happens only once (when the option is issued). if you still don't agree or understand what i am saying, please describe specifically what you think is double booking, and i will respond specifically. but again, the reason i think it is not double is that you really have two separate elements: the option grant (expense), and the share issuance (dilution). one could of course debate whether to include out of the money options in diluted share count, but i think such options are typically not included. 2) How will you reconcile the earnings with the cash flow if the ficticious options price is included in the earnings but never shows up in the cash flow? this is easy enough (after all, the reason cos report c/f and earnings separately is so we can look at different sides of the same entity, so there is a lot of reconciling going on already). if they are noncash charges, obviously they will not show up in cash flow. depreciation and amortization don't show up in cash flow either (i.e., they are added back to cash flow from the income statement), yet people have been happily reconciling those for ages. instead of EBITDA maybe we can talk about EBITDAF (earnings before taxes, depreciation, amortization, and fleecing) -g-. FWIW, personally i think options should be expensed up front based on Black-Scholes, and subsequently their effects should show up in share dilution (just as it happens in the real world). Hence, if options price has to be in the earnings statement it should be market valuation at time of issue since the whole point of earnings (vs Cash Flow) is to smooth things out, not exacerbate them.) i agree with your conclusion but not with your deduction. the reason i have for reaching the same conclusion as you is that option compensation has real economic value, and therefore this real value should show up as an expense against earnings. it is following this logic that Standard & Poor has now recommended "core earnings" which reflect the true economic value of options issuance. For instance, I think all executive compensation, including options, should be voted on yearly by the shareholders with the ballot showing a wide range of possibilities, not just yes/no well, that is a very nice thought, and it is on my wish list right after peace, love and harmony (oh, very nice, but maybe in the next world). large cos are run for the most part by greedy pigs who stuff their boards with other greedy pigs. they scratch each others' backs and give each other raises, to the point that many of these scumbags are now making well into eight figures and may earn in excess of half a billion over their worthless careers, even as their stocks go nowhere and they fire frontline workers by the ten-thousands. they are NOT a democracy, and they will NEVER let little fish shareholders determine their compensation. if you think you can do something about it, good luck! Warren Buffett hasn't been able to influence the salaries of the CEOs whose boards he sits on! he says it's not possible and he's been on 19 boards so he should know