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To: Kevin Melia who wrote (3436)	7/21/1998 10:39:00 AM
From: Allen Benn	Respond to of 10309

Therefore, even if a company is losing money now, their expected future cash flows must at some point turn positive in excess of the stock option valuation in order to justify the current valuation. Furthermore, the current valuation must be accurate or else their would be an opportunity for short-sellers to make some money. If the market is efficient, what you say is correct. However, the fact that the Black-Scholes options valuation formula assumes an efficient market does not make it so. Indeed, the row about employee stock options is based on the premise that the true cost of options is ignored inappropriately by the market, which of course can not happen if the market is even weakly efficient. What matters to me is that a company provides enough additional information so that I can recalculate the EPS if I don't agree with the method that they used to arrive at their number (e.g. I can subtract out what I think the charge should be for outstanding options). You are absolutely correct about this, and I think everyone on the thread agrees with you. At issue is how the EPS should be recalculated, and what changes might occur if you do. As I indicated in a prior post, I have always included expected share dilution in my projections, so I doubt if any of this discussion will have a material impact on my calculations. And if they don't impact my calculations, I wonder if they will for the majority of institutions and many other investors who own the stock. For example, analysts routinely build in the dilutive effects of stock options. Maybe the market really is efficient, at least in this regard. Allen