A lot of talk over the last few years has been devoted to expensing stock options on the P&L.  The logic is investors can't properly value a public company with options being expensed.  I don't get it!

According to Brealey & Myers the value of a business is determined by the present value of its cash flows.  After you estimate the businesses cash flow and discount it back to the present day, you adjust for cash and debt and then get the company’s equity market value.  To determine the per share price you simply divide this number by the fully diluted shares outstanding.  This last part is particularly important for public companies with options.  Specifically, the denominator (i.e. the shares outstanding) will continue to grow assuming employees are exercising options.

If this is the case, then an investor simply needs to make an assumption how much the share base with grow (or decrease) going forward.  This simple fact accounts for the true cost of options and why I think it is irrelevant to expense options on a P&L.  In fact, expensing options using Black Scholes will create even more uncertainty as public companies will be able to easily manipulate the true cost of options (like they do with pension plans).