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

To: Kirk © who wrote (64749)	9/19/2003 12:42:52 PM
From: rkral	Read Replies (1) \| Respond to of 77400

OT ... Kirk, re "It is irrelevant to the case of issuing an option that expires worthless." That's true. But options don't always expire worthless, just like they aren't always exercised with an intrinsic value equal to 10 times the exercise price. At expiration, there is a non-zero finite probability for every stock price outcome between $0 and $X, where X is a very large number. The probability for all these prices is distributed according to what is known as the log-normal probability density function. The probability of $0 and $X outcome is virtually zero, but an outcome near the current price is quite high. When the profit-loss profile for a call option with a specific exercise price is applied -- a mean expectation is calculated. That mean expectation is the "fair value" of the option .. at that point in time. Think about the simple coin toss. The mean expectation for a coin toss is 50% heads, or 50% tails -- take your pick. But that doesn't mean the coin lands on its edge. The outcome of a single coin toss will be either heads or tails. But if the coin is flipped often enough, the total occurrences of heads will approximate the total occurrences of tails. Similarly, the outcome of a single call option will not be the calculated mean. But over many such options, over varying markets, by many companies, the sum of gains will equal the sum of the losses. There are some details that make that statement not true .. exactly .. but you're not ready to go there IMHO. And I will not now fill in the table as you requested, because you're not ready to go there either. As John Shannon said, one must first have come to the conclusion that ESOs should be expensed. Then, and only then, are details of calculating the expense really relevant. Regards, Ron P.S. In the interests of getting this thread back on-topic, I intend to refrain from further options posts here .. for the short term, at least. I started a ESO thread in June 2002 for this purpose .. and feel a bit hypocritical when posting extensively here. #subject-53027 Fortunately for me, the feeling doesn't last long. <g>

To: Kirk © who wrote (64749)	9/19/2003 12:45:10 PM
From: PerryA	Respond to of 77400

You make a great argument for why stock compensation that vests immediately should be expensed immediately. I assume this means that you also agree with the argument. If so, then perhaps you could agree that stock compensation that vests gradually should be expensed gradually. Once vested, it is irrelevant to the expense issue what happens to the value of an option in the future, even though it matters with regard to financing. In other words, once the option is the employees (all vesting or other events have occurred which fix the employees ownership of the option) then the employee has an investment asset that can go up or down just like any other investment. We don't adjust cash wage expense based on the investment results of the employee, nor do I believe anyone would think that makes sense (well, we might find one or two takers <g>). Regards, PerryA