Well, yes and no. Yes, it is an IR telescope, but, its primary observation target when stars and galaxies first formed in the universe. Due to the expansion of the universe (thank you Dr. Hubble), the light from the objects formed at that time has been redshifted, so we need an IR telescope to see them. We will be looking at what was visible light at the time it was emitted. This is really important work, because we don't currently have any way to observe objects from this time period.
That said, while it does seem like common sense to keep Hubble going, because we obviously need top notch visible light telescopes, I guess we have to ask how good we could do today with that same money using ground based adaptive optics telescopes. For less than the price of one Hubble service mission, we could build the Giant Magellan Telescope.
Well, yes and no. Yes, it is an IR telescope, but, its primary observation target when stars and galaxies first formed in the universe. Due to the expansion of the universe (thank you Dr. Hubble), the light from the objects formed at that time has been redshifted, so we need an IR telescope to see them. We will be looking at what was visible light at the time it was emitted. This is really important work, because we don't currently have any way to observe objects from this time period.
That said, while it does seem like common sense to keep Hubble going, because we obviously need top notch visible light telescopes, I guess we have to ask how good we could do today with that same money using ground based adaptive optics telescopes. For less than the price of one Hubble service mission, we could build the Giant Magellan Telescope.
just giving the information I heard on NPR last night...
That is obviously the problem. I would not expect them to know that splits don't impact earnings or revenue and that Microsoft did in fact give a huge dividend last year.
Sure, you can say profits have doubled, if last quarter was unusually bad, or you took some large charges last quarter, or if there was some non-recurring windfall this quarter.
True, but, did Microsoft actually have either of those conditions?
And IIRC they were losing money on xbox hardware, how can they make that up on volume?
While they do loose money on each Xbox, some of those costs are fixed, so the more they sell, the less they loose. Also, they make money on the games, accessories, XBox Live, etc. They made a profit on the whole XBox program.
Their earnings are lower because they did not split or offer a dividend? WTF are you talking about? A split would have no impact whatsoever on earnings. As for a dividend, last year, Microsoft paid out the largest one time dividend in the history of the world ($32 Billon), doubled their annual dividend to 32cps and announced a $30 Billon four year stock buy back.
Microsoft's dividend was so large, it actually increased US personal income by 2.9%!
"All you did was sell benzapp a widget with $48 in cash taped to it. That $48 was a real expense.
You could have saved benzapp the hassle of reselling that widget (and thereby reducing your other widget sales by one) by simply handing him that $48 cash without taping it to a widget purchase. The final result is identical."
This is an inaccurate picture of stock options. The second part is obviously clear, if you give him $48, you have an expense of $48, but that is not the same as an option with a strike price $48 below current market.
With options, you have four factors:
1. The number of shares granted.
2. The strike price (at or below current market).
3. Vesting schedule (when the options can be exercised).
4. Expiration date (usually 10 years).
So lets say we get a grant of 100 shares at current market (say, $10/share). They will vest at 25% per year (after one year, you can exercise 25 shares, after another year, another 25, etc.) and expire after 10 years.
Now tell me, how much of an expense shall I record in my books? Who can say what these options will be worth? No one. We may hope they will be worth something, but they might not be.
If you leave the company before they vest, you get nothing.
If the stock price stays at or below $10 from the time they vest to the time they expire, you get nothing.
Let's say at year one, the stock is now worth $15, you can then exercise the 25 vested options and sell them for a total profit of $125 (minus tax). At that time, if the company does nothing else, the following will happen:
1. The employee will be $125 richer.
2. The shareholders will have had their stock diluted by 25 shares.
3. The company will not have incurred any real expense whatsoever.
Many companies will buy back stock from the open market to compensate for the dilution, which is a reported expense today.
The point is that your example is just plain wrong. It is not at all the same as just handing them the money. With options, they may well end up being worth nothing.
The company winds up with ZERO cash expenses! They just buy everything by issuing more and more stock. Every dollar they take in is pure profit. They could literally just burn the dollars.
Wrong. Your example breaks down quickly. In your example, with today's accounting rules, if they issue stock for everything, that stock is counted as a current liability AND a dilution of the share pool.
If any company took it to the extreme you suggested, the stock would drop in value dramatically because of the dilutive effect.
For many companies, options turn into an expense because they buy back shares to prevent dilution, but that is recorded as an expense when it happens, so I don't see a problem.
"The problem is that, when granted, stock options do not cost anything to the company and have no dollar value
SURE they do! How much could the company have sold those options for on the open market?"
No they don't, unless they are granted at below market value, but even that does not help your example. If the options are granted at fair value, then selling them on the open market would be a zero sum (cost of sale = income). If they sold them x% below FV, they would have to increase the cost of sale, and it would still be zero sum.
"the company had not given those options to the employees for free they could have had exactly that much more cash, and the company effectively handed that cash to the employees instead of the options."
Not really. When they handed out the options, no cost was incurred. The only thing that was incurred was a potential future liability of something between zero and ?.
One more time, when an employer hands out options, there is no actual current expense, only potential future liability, so why not just note the potential future libaility as a potential future libaility in share/strike price terms (because that is what it is) instead of a current expense (which it simply is not)?
"Because it is a basic tenet of accounting that things given away which have value must show up on the ledger. Companies are giving away options, which have a value (much bigger than 0!), and not reporting them on their ledgers."
The options are shown today on the 10K. If we force companies to guess how much they might be worth in the future, it will just inject a bunch of meaningless noise into the statements. The noise will have to be revised every quarter, and in the end, the options may end up being worth nothing (as happens frequently). I know many people with tens of thousands of options that are not likely to ever be worth anything.
I just don't see the value of the dart throwing here. Yes, there are many formulas that can be used to calculate the value of the options, but I think we can agree that they will all be basically wrong.
We already have the basic data in the 10K on ESOP shares outstanding, stock dilution, etc. This will let you do your own dart throwing. Since all of the real data is already on the books, what is the value of the company doing some dart throwing on top of it?
"No more so that the options are already impacting profitability. The company could have sold those options on the open market. The company effectively "sold" those options to the employee *and* simultaneously handed the purchase price to the employee in cash. That effective cash transfer to the employee is an effective expense"
There is no impact until the options are exercised. It is not an effective cash transfer at the time of the grant, only at the time the options are exercised.
"According to Bear Stearns, there would be a 60% drop in profits if the new rule were imposed."
Someone is going to have to explain that to me.
Today, the expense for options shows up if and when the options are exercised by the company either diluting the stock pool or buying back shares to compensate. Either way, this shows up in the financial statements. It just shows up at the point the options are exercised, as opposed to the current proposal to guess what their value might be and then stick that guess into the financial statements (and re-do the guesses every quarter).
The point is that we can either use real data (and get it when it happens), or we can use meaningless data earlier. It looks to me from the quote above that the guess produces a 60% error on average from reality.
"So you get the initial estimate *and* wind up at the correct value at the end."
The problem with that is you can have things moving all over the map from one quarter to the next for what may amount to nothing. There may end up being no cost at all, or it may be much higher. Yes, it would be correct in the end, but it would just muck up the financial statements with a bunch of noise.
You already have the info on outstanding ESOP in the 10K. You can do your own calculation and factor that in if you want. So why muck up the statements with a bunch of dart throwing?
How do you want a company to guess at the cost of expensing options? Throw darts? The NASB stuff is a joke.
The problem is that it may never cost anything, or it may cost millions. You really don't know until they are actually exercised or they expire.
Why not just use the existing data on share dilution and outstanding options and make your own guesses? Then you won't sue the company ever quarter when they revise their estimates.
The problem is that it may never cost anything, or it may cost millions. You really don't know until they are actually exercised or they expire.
Why not just use the existing data on share dilution and outstanding options and make your own guesses? Then you won't sue the company ever quarter when they revise their estimates.
No, the options have a value when you buy them (or are given them). This value takes into account the current price of the stock, the volatility of the stock, etc. Granted, it is an estimate of what the future value of the option will be, but that's the best one can do.
Imagine a slot machine. If you knew the chance for a payout was 1/10, say, and the average payout was $1, then the value of a pull of the handle is $0.10. With options, this number is much more difficult to estimate, but it exists.
How does it exist? With a slot machine, an individual spin of the wheels can go any which way, but over time they will trend toward the norm. With stocks, you really can't pick a norm that they will trend toward, particularly with certain types of companies.
You already have all the data you need to make your own estimate, why force the company to throw darts for you? Then you will complain that they threw the darts wrong when they have to revise their dart throwing every quarter.
"... by the time the shareholder finds out what those options cost, they've already been screwed, the options have been excised and his shares are diluted.
Why exactly shouldn't the shareholders be told?
Profit before options expensing $X
Cost of options $Y
Profit after options expensing $(X-Y)
The cost of the options is calculated using FASB rules, just like depreciation, goodwill and so on. Why shouldn't the shareholder see that number? "
The cost calculated using the FASB rules is worthless. It bears no relationship to anything real, so why bother with it?
Isn't the average strike price calculatible from the impact of dilution listed in the 10K?
First, until the option expires valueless, it'll always have some value (particularly if it's well above water). Second, it's deceptive to ignore the cost of options until the last minute. Accounting should reflect reasonably well the actual value of the company. Allowing a company to hide real expenses like options means that you have to search harder to find the information that should be readily available.
If the option has not expired, but is way under water, how does it have value?
Information on options is readily available today, just check the 10k. To suggest that the options are hidden is silly, the information is there for all to see.
What is silly is to ask a company to "estimate" the cost of the options before their are exercised. Estimates would have to be revised quarters, with costs constantly going up and down, which will just inject a lot of noise into the reports with no real value.
Writing options should actually not hit earnings at all... The company needs to just create new stock, and write options on them or reserve them especially for their employees. Then there is no cost except for the cost of the shares themselves when the company actually buys the shares.
Well, you are correct that their is no earnings hit in your example, but there is a hit to share values because the shares outstanding would be diluted. If a company buys back (or holds back) shares to compensate for the dilution, then that is the cost and is shown as a hit against earnings today.
They do have a cost, just it is an unknown future cost.
Yes, but that future cost may be zero. The employee may leave before the options vest, or the options may never get above their strike price, hit their experation date and disappear.
The future cost may be zero, or it may be significant. Today, public companies list their outstanding ESOP on their 10K SEC filings, and then either buy back stock to compensate for exercised options, or just let the options dilute the share pool. Either way, investors have all of the data about the options out there and how they will be managed. If any cost is actually incurred, then the company will report that. What is wrong with that?
You can currently buy stock options in the market, why not use a similar system?
The fee to buy an options contract is very low. The real value will not be know until the options mature or are sold, much like employee stock options. So why should employee stock options be treated any differently?
Slashdot Mirror
That said, while it does seem like common sense to keep Hubble going, because we obviously need top notch visible light telescopes, I guess we have to ask how good we could do today with that same money using ground based adaptive optics telescopes. For less than the price of one Hubble service mission, we could build the Giant Magellan Telescope.
That said, while it does seem like common sense to keep Hubble going, because we obviously need top notch visible light telescopes, I guess we have to ask how good we could do today with that same money using ground based adaptive optics telescopes. For less than the price of one Hubble service mission, we could build the Giant Magellan Telescope.
The replacement for Hubble is well underway. The James Webb Space Telescope is set for launch in 2011.
The replacement for Hubble is well underway. The James Webb Space Telescope is set for launch in 2011.
Their earnings are lower because they did not split or offer a dividend? WTF are you talking about? A split would have no impact whatsoever on earnings. As for a dividend, last year, Microsoft paid out the largest one time dividend in the history of the world ($32 Billon), doubled their annual dividend to 32cps and announced a $30 Billon four year stock buy back.
e ch nology/2002157688_dividend22.html
Microsoft's dividend was so large, it actually increased US personal income by 2.9%!
http://seattletimes.nwsource.com/html/businesst
Install it now! Say what you will about MS, but this looks like a good improvement. Maybe I'll wait untill you all install it first...
Stalin would be proud.
You could have saved benzapp the hassle of reselling that widget (and thereby reducing your other widget sales by one) by simply handing him that $48 cash without taping it to a widget purchase. The final result is identical."
This is an inaccurate picture of stock options. The second part is obviously clear, if you give him $48, you have an expense of $48, but that is not the same as an option with a strike price $48 below current market.
With options, you have four factors:
1. The number of shares granted.
2. The strike price (at or below current market).
3. Vesting schedule (when the options can be exercised).
4. Expiration date (usually 10 years).
So lets say we get a grant of 100 shares at current market (say, $10/share). They will vest at 25% per year (after one year, you can exercise 25 shares, after another year, another 25, etc.) and expire after 10 years.
Now tell me, how much of an expense shall I record in my books? Who can say what these options will be worth? No one. We may hope they will be worth something, but they might not be.
If you leave the company before they vest, you get nothing.
If the stock price stays at or below $10 from the time they vest to the time they expire, you get nothing.
Let's say at year one, the stock is now worth $15, you can then exercise the 25 vested options and sell them for a total profit of $125 (minus tax). At that time, if the company does nothing else, the following will happen:
1. The employee will be $125 richer.
2. The shareholders will have had their stock diluted by 25 shares.
3. The company will not have incurred any real expense whatsoever.
Many companies will buy back stock from the open market to compensate for the dilution, which is a reported expense today.
The point is that your example is just plain wrong. It is not at all the same as just handing them the money. With options, they may well end up being worth nothing.
If any company took it to the extreme you suggested, the stock would drop in value dramatically because of the dilutive effect.
For many companies, options turn into an expense because they buy back shares to prevent dilution, but that is recorded as an expense when it happens, so I don't see a problem.
SURE they do! How much could the company have sold those options for on the open market?"
No they don't, unless they are granted at below market value, but even that does not help your example. If the options are granted at fair value, then selling them on the open market would be a zero sum (cost of sale = income). If they sold them x% below FV, they would have to increase the cost of sale, and it would still be zero sum.
"the company had not given those options to the employees for free they could have had exactly that much more cash, and the company effectively handed that cash to the employees instead of the options."
Not really. When they handed out the options, no cost was incurred. The only thing that was incurred was a potential future liability of something between zero and ?.
One more time, when an employer hands out options, there is no actual current expense, only potential future liability, so why not just note the potential future libaility as a potential future libaility in share/strike price terms (because that is what it is) instead of a current expense (which it simply is not)?
The options are shown today on the 10K. If we force companies to guess how much they might be worth in the future, it will just inject a bunch of meaningless noise into the statements. The noise will have to be revised every quarter, and in the end, the options may end up being worth nothing (as happens frequently). I know many people with tens of thousands of options that are not likely to ever be worth anything.
I just don't see the value of the dart throwing here. Yes, there are many formulas that can be used to calculate the value of the options, but I think we can agree that they will all be basically wrong.
We already have the basic data in the 10K on ESOP shares outstanding, stock dilution, etc. This will let you do your own dart throwing. Since all of the real data is already on the books, what is the value of the company doing some dart throwing on top of it?
"No more so that the options are already impacting profitability. The company could have sold those options on the open market. The company effectively "sold" those options to the employee *and* simultaneously handed the purchase price to the employee in cash. That effective cash transfer to the employee is an effective expense" There is no impact until the options are exercised. It is not an effective cash transfer at the time of the grant, only at the time the options are exercised.
Today, the expense for options shows up if and when the options are exercised by the company either diluting the stock pool or buying back shares to compensate. Either way, this shows up in the financial statements. It just shows up at the point the options are exercised, as opposed to the current proposal to guess what their value might be and then stick that guess into the financial statements (and re-do the guesses every quarter).
The point is that we can either use real data (and get it when it happens), or we can use meaningless data earlier. It looks to me from the quote above that the guess produces a 60% error on average from reality.
I'd rather use real data.
You already have the info on outstanding ESOP in the 10K. You can do your own calculation and factor that in if you want. So why muck up the statements with a bunch of dart throwing?
The problem is that it may never cost anything, or it may cost millions. You really don't know until they are actually exercised or they expire.
Why not just use the existing data on share dilution and outstanding options and make your own guesses? Then you won't sue the company ever quarter when they revise their estimates.
Why not just use the existing data on share dilution and outstanding options and make your own guesses? Then you won't sue the company ever quarter when they revise their estimates.
You already have all the data you need to make your own estimate, why force the company to throw darts for you? Then you will complain that they threw the darts wrong when they have to revise their dart throwing every quarter.
Why exactly shouldn't the shareholders be told?
Profit before options expensing $X
Cost of options $Y
Profit after options expensing $(X-Y)
The cost of the options is calculated using FASB rules, just like depreciation, goodwill and so on. Why shouldn't the shareholder see that number? "
The cost calculated using the FASB rules is worthless. It bears no relationship to anything real, so why bother with it?
Isn't the average strike price calculatible from the impact of dilution listed in the 10K?
Information on options is readily available today, just check the 10k. To suggest that the options are hidden is silly, the information is there for all to see.
What is silly is to ask a company to "estimate" the cost of the options before their are exercised. Estimates would have to be revised quarters, with costs constantly going up and down, which will just inject a lot of noise into the reports with no real value.