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

To: Don Lloyd who wrote (63597)	4/18/2003 12:48:22 AM
From: Stock Farmer	Read Replies (1) \| Respond to of 77400

Don, The company can't own itself, sure, but what a company can do is make existing shareholders own less of it by creating more shareholders!!! Which is just as effective a way of decreasing the assets that existing shareholders can claim, as spending its capital. Take an oversimplified example. If a company with 100 shares and $100 net-present-value in assets spends $90, that "expense" leaves the shareholders less well off. But what happens instead if a company issues another 900 shares? Is that an expense or not? The proper answer is "that depends". In the issuing of the shares there is management's decision HOW MUCH TO RECEIVE IN RETURN, and this alone determines whether the transaction in which they engage is or is not an expense. For example, if management decides to issue 900 shares and collect $1.00 each, then our shareholders are not affected at all. Before hand, each shareholder held the promise of $1 in current-and-future assets. After the transaction they hold the same amount. This is nondilutive. If management decides to issue 900 shares and collect $2.00 each, then our shareholders are enriched, and if management elects to receive $0 in return, then our current shareholders are made less wealthy. These are anti-dilutive and dilutive transactions respectively. One can't tell at all whether dilution occurred just by looking at an increase in share count!! In all cases the share count increased by 900, but in one case shareholder wealth was not affected, in another it was increased and in the third it was reduced. So instead of the absolute increase in shares, the part that we SHOULD be accounting for is the expense or income, to shareholders that management indeed did incur on their behalf. Or expects to incur, as a consequence of its decisions. Just like paying wages. And when the issuing of shares for below-market-prices in satisfaction of wage obligations... well, that turns out to be an expense (shareholder wealth went down) incurred as a consequence of employment (act intended to make it go up)... which puts it in the proper perspective in the ledger like any other wage expense. And "profit" is the difference between the two, not merely the benefit of one without accounting for the cost of the other! Which is where the chicanery of stock options comes in. Feel free to join the debate about the best way to assign a numerical value to this expense. But it isn't zero. If you think it is zero, then try to take one of these worthless things away from an employee. Or convince a shareholder to give you an option for free. Even exchange traded options have non zero value. It isn't rocket science. It isn't even economics. It's just common sense. John