To: RetiredNow who wrote (3670 ) 11/22/1998 2:44:00 AM From: Chuzzlewit Respond to
Mindmeld, I provided a concrete example in a previous post. Basically the effect is to decrease the value of the shares that you hold, because the issuance of new shares increases the capitalized value of the company only to the extent that cash is received at the exercise price. But since the number of shares increases the result is that the value per share decreases, and the total drop is equal to the difference between the exercise price and the market price times the number of options exercised. When you see the number of shares used in financial reporting slowly creeping up, that is the result of exercising the options. In order to watch this stuff closely you should pay close attention to the equity section of the balance sheet. Assuming that the company has not repurchased shares, you can figure out how many options were exercised by finding the increase in "capital stock at par", and dividing by the par value of the stock. Next, you can figure out what the average exercise price was by taking the total equity at the end of the period, subtracting the beginning equity and subtracting the earnings for the period. Then divide that number by the the number of new shares issued. Next, you can figure out the approximate cost to shareholders by assuming an average share price for the period and subtracting from that number the average exercise price. Multiply that by the number of new shares issued and you will have figured out the approximate amount by which management has misrepresented the cost of labor during the period.
