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Strategies & Market Trends : Good Investment Theses: VALUATIONS w/ FUNDAMENTAL ANALYSIS -- Ignore unavailable to you. Want to Upgrade?

To: Edwarda who wrote (112)	4/26/1999 1:25:00 PM
From: Chuzzlewit	Respond to of 160

Edwarda, I thought I had already conceded the point raised by Chris. If not, let me repeat: the situation in which a startup company needs to conserve cash is ideal for the use of employee stock options. I concede that point. But now, let's move to the opposite extreme: the large, well endowed corporations, ones like MSFT. Now I realize that with you stroking my ears my judgement tends to shift to other matters and my mind does tend to cloud a bit, but this morning I am alert. So here is some analysis for you: Suppose we are dealing with a hypothetical company with a $1BB capitalization. Let's suppose that this company issues $50MM in options at an exercise price of $10MM. I think we will agree that $40MM in value was transferred from stockholders to employees. Now let's look at it from a practical point of view: the $40MM as cash payment would be a tax-deductible event. Let's assume a 30% statutory rate.That would mean that the cost to shareholders would drop to $28MM (40 - 12), and it would avoid dilution. I know that there is a tax credit associated with issuing employee options, but i don't know how much it is, so I can't provide that part of the equation. Maybe these are the issues we need to look at further. You may now resume stroking me if you like .... CTC