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

To: Don Lloyd who wrote (64601)	9/15/2003 5:45:52 PM
From: willcousa	Read Replies (3) \| Respond to of 77400

Has anyone suggested that economically - when the employee excercises his or her option the company would normally have an economic loss for the amount the employee gains because they could have sold that amount of stock for its fair market value on that date rather than for the amount received from the employee? Will

To: Don Lloyd who wrote (64601)	9/15/2003 8:56:03 PM
From: RetiredNow	Read Replies (1) \| Respond to of 77400

Don, if what you say is true, that "the value of the granted stock or options to the company is not difficult to calculate at all, because it is PRECISELY ZERO", then why wouldn't a company issue stock options and shares to suppliers and employees ad infinitum? I'll tell you why. Because the company would become watered stock and no investor would touch the company with a ten foot pole. At that point, the company would no longer be able to pursue any form of equity financing whether it's through share issuance to primary and secondary markets or whether it's through indirect equity financing through issuance of stock options. What then? Stockholders would unload as much of the company's shares as possible until the company is delisted. Then the company would only survive in so far as it's ability to generate working capital from cash flows from operations or from debt financing. Take it a step further, for anyone trained in finance, it's an intricate balancing act to get the right balance of equity and debt financing to ensure that you are squeezing the maximum return on invested capital out of your company. If a corporate finance department let the above scenario play out, they'd end up with a company that was highly inefficient at generating a return on investment and they should be fired. I don't know of any trained financial professionals who would recommend the kind of dilution that can play out through excessive equity financing and stock options issuance.

To: Don Lloyd who wrote (64601)	9/15/2003 11:37:58 PM
From: Stock Farmer	Respond to of 77400

the value of the granted stock or options to the company* is not difficult to calculate at all, because it is PRECISELY ZERO.* An excellent example of something that is both true and irrelevant simultaneously. And it is a mark of high pride in academia to arrive at such fine points from as many places as possible simultaneously. But not much use in the real world. It is true because it is true. Stock options have negligible value to the company. Or, more precisely, if they have value to the company, it is indeterminate and not quantifiable in dollar terms. However, this does not mean that the processs of issuing stock options to employees and the subsequent exercise does not involve an expense by the company. Or in other words, that the company does not (a) create an obligation to employees arising from wage compensation and (b) subsequently satisfy this obligation. Nor does it mean we can not place a deterministic value on the obligation. It has a value that we can estimate at the time of option grant (or any time thereafter) and know precisely at the time of option exercise. And just because the stock option embeds an equity financing instrument that completely covers the wage obligation with positive cash flow to spare... and which also satisfies the obligation in the instant of exercise well, that also doesn't mean that the obligation didn't exist in the first place. It just means that the company satisfied the obligation from the proceeds of a concurrent financing activity. But the satisfaction of the obligation... the expense... well, that is very real. And all of these are true even though the instrument that facilitates the transaction is of no value to the company in and of itself. The source of the expense is not the piece of paper and it is not the giving of the paper that represents the expense being incurred. It is the satisfaction of the attached wage obligation that is the expense. And this expense is identifiable independent of how the company sources capital to satisfy it, even though the instrument used to effect the expense embodies a financing activity more than sufficient to satisfy the expense. It shouldn't be that difficult to understand.