Minyan Mailbag: More CSCO Derivatives
Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next column with that very intent.
I'm clearly slow on the trigger today, saw your post.
Here is the thing. Sure, Cisco (CSCO) can float these things low and try to keep the valuation low. I guess the 'select' market makers will do what they can to keep value low in exchange for other considerations from the company?
As you note unless the stock either stays in the tank or volatility goes
very low, how would they keep these things from increasing in value? Are they proposing that the value they will book will simply be the day they are sold to these market makers?
If so, let's assume they get to keep the expense side as low as they
can. Now, if those options increase in value, do they get a larger tax
break on the other side to balance out? I'd have to presume they must
think this is the case or they would not be assuming that their tax
break will far outweigh the expense side. If the value of the options go below where they sold them, what tax benefit do they reap? Wouldn't
their expense side be larger than the tax benefit?
Further, what does this say about what CSCO must think of their
prospects for the future?
Our understanding is that this is a one time expense. As the stock rises and the value of the options changes, there will be no further adjustment made for tax purposes. Although this is not correct treatment, we think that is how it is.
It shows that the company knows it will create dilution with a higher stock price. It will help make the employees' options over the long run worth less.
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