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: RetiredNow who wrote (62741)	1/21/2003 6:23:19 PM
From: rkral	Read Replies (1) \| Respond to of 77400

mindmeld, I'm just beginning to try to understand CF and FCF, so please bear with my questions. Why is APIC excluded from FCF? Aren't you talking about the exercise price the company receives upon option exercise? Isn't that bona fide cash? Why would bona fide cash be excluded? It appears to me that cash flows from financing and investing activities are never included in FCF. IOW, FCF only includes selected accounts from operating activities. Is that interpretation correct? If yes, why is that true? TIA, Ron

To: RetiredNow who wrote (62741)	1/21/2003 9:51:03 PM
From: Stock Farmer	Read Replies (2) \| Respond to of 77400

Seems this "how do we value companies with stock options" is quite a rich topic. the tax shield value [of stock options] is already accounted for in net income No, I don't think so. Net Income reported to shareholders includes a deduction for income taxes assuming stock options are zero cost. Net Income reported to the IRS includes a deduction for income taxes assuming stock options have a cost. The difference is not paid out and therefore remains an asset available to shareholders that is not included in free cash flow. On this: the APIC amount has nothing to do with free cash flows. So no adustment needed... I agree here. Partially. No need to add back to shareholders the wealth they already had in the first place. APIC is a measure of wealth transfer, not wealth creation. However, there's a missing factor that people lose sight of, which is the amount of shareholder wealth that insiders pocketed along the way!! Which is (#shares issued X share price) - APIC + tax shield. Maybe some day you will do the math on this for Cisco over the past five years and compare it to their lifetime retained earnings. Or any other suitably impressive large number. This has to be SUBTRACTED from total wealth creation by the enterprise for shareholders, 'cause it is wealth transfer from shareholders that occurs in the process of creating the wealth we are calculating. In other words, shareholders are better off by the amount of wealth created by the company (e.g. free cash flows), plus the amount of wealth preserved by the company by not paying taxes, minus the amount that insiders scamper away with, minus the amount paid out to folks who aren't shareholders any more (e.g. buybacks). All discounted to present value. This total amount is then divided by the number of shares intended to be sharing in the gains in order to get the "value" of a single share. So I do agree with you on this approach: Then the model I'm using discounts the cash back to present value, but divides by the projected terminal fully diluted o/s share #. Regards, John