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Technology Stocks : Intel Corporation (INTC) -- Ignore unavailable to you. Want to Upgrade?

To: Elmer Phud who wrote (177858)	5/8/2004 4:33:42 PM
From: GVTucker	Respond to of 186894

elmerp-- Intel will sell microprocessors next quarter which do not exist anywhere on Intel's financials right now. That doesn't make those processors any less real, or the revenue they generate any less valid. Options that Intel awards next quarter could very easily not exist right now anywhere on Intel's financials and still be a legitimate expense next quarter.

To: Elmer Phud who wrote (177858)	5/9/2004 8:51:35 AM
From: rkral	Read Replies (1) \| Respond to of 186894

OT .. elmerp, excerpt from "For the Last Time: Stock Options Are an Expense" by Zvi Bodie, Robert S. Kaplan, and Robert C. Merton, Harvard Business Review, March 1, 2003. A (not free) reprint available from harvardbusinessonline.hbsp.harvard.edu >> "Imagine two companies, KapCorp and MerBod, competing in exactly the same line of business. The two differ only in the structure of their employee compensation packages. KapCorp pays its workers $400,000 in total compensation in the form of cash during the year. At the beginning of the year, it also issues, through an underwriting, $100,000 worth of options in the capital market, which cannot be exercised for one year, and it requires its employees to use 25% of their compensation to buy the newly issued options. The net cash outflow to KapCorp is $300,000 ($400,000 in compensation expense less $100,000 from the sale of the options). MerBod’s approach is only slightly different. It pays its workers $300,000 in cash and issues them directly $100,000 worth of options at the start of the year (with the same one-year exercise restriction). Economically, the two positions are identical. Each company has paid a total of $400,000 in compensation, each has issued $100,000 worth of options, and for each the net cash outflow totals $300,000 after the cash received from issuing the options is subtracted from the cash spent on compensation. Employees at both companies are holding the same $100,000 of options during the year, producing the same motivation, incentive, and retention effects. In preparing its year-end statements, KapCorp will book compensation expense of $400,000 and will show $100,000 in options on its balance sheet in a shareholder equity account. If the cost of stock options issued to employees is not recognized as an expense,however,MerBod will book a compensation expense of only $300,000 and not show any options issued on its balance sheet. Assuming otherwise identical revenues and costs, it will look as though MerBod’s earnings were $100,000 higher than KapCorp’s. MerBod will also seem to have a lower equity base than KapCorp, even though the increase in the number of shares outstanding will eventually be the same for both companies if all the options are exercised. As a result of the lower compensation expense and lower equity position, MerBod’s performance by most analytic measures will appear to be far superior to KapCorp’s. This distortion is, of course, repeated every year that the two firms choose the different forms of compensation. How legitimate is an accounting standard that allows two economically identical transactions to produce radically different numbers?" << About the authors: Zvi Bodie -- people.bu.edu Robert S. Kaplan -- dor.hbs.edu Robert C. Merton -- britannica.com Ron