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Hi Jim

Aaaaah, Fishbone, showing your generation :)) So while your skankin to the beat I have two questions?

What is the rational against using the same equation as issuing the cost of new equity when finding the cost of stock options?

Second, what is the formula you use for estimating the cost of restricted stock?

**** Answering my own question (is that legal?) ****

The equation for issuing new equity is KoE/(1-flotation cost). What if we switch out flotation cost and add the actual cost assuming all stock options were excercised. This would lead us to something like the current price minus the strike price netting the savings from taxes all divided by the current price. At this point I have ignored the dilution effect and it should be included - but for now lets keep it simple. Using GRMN's numbers:

((\$81.13 - \$38.57) * ( 1 - .35))/(\$81.13) = .341 or 34.1%

So the 34.1% (at least to me) represents a discount to current prices adjusted for the savings in taxes. Now finishing off the equation using the 11.36% cost of equity for GRMN:

.1136 / (1 - .341) = .17238 or 17.238%

Anyway I haven't seen this anywhere which doesn't mean much but wonder what you think? Further this seems like the way to deal with restricted stock grants.

Matthew

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