Exercising Stock options - manipulation of CFO

CFA Level I
#1

How can the use of stock options increase CFO?

I get how exercision of these options will produce a tax benefit for the firm, but does taxes payables decrease as well, which would result in CFO decreasing for the company?

#2

Instead of paying Bob his salary (a CFO outflow), you give Bob stock options, with a low strike price.

Bob exercises those options and gets the stock.

You repurchase the stock from Bob, a CF_ F _ outflow.

CFO’s higher, CFF’s lower.

#3

  1. I understand how stock options rather than cash compensation would make CFO higher, but when the options are actually exercised themselves, are they classified as anything on the cash flow statement?

  2. I read that share repurchases to avoid dilution after the options were exercised should be classified as CFO rather than CFF, but I’m not sure if this is correct (it is from the Schweser 2013 book for level 1)

#4

  1. If there’s an exercise price, they have to pay you cash to exercise them; that cash flow is CFF.

  2. You’re talking about how it should be classified by an analyst. Companies trying to manipulate cash flow don’t always classify things they way they should be classified by an analyst.

#5

Maybe what I do not get how the tax benefits associated with the stock options. How does that increase CFO?

#6

It’s not a matter of tax benefits.

Company A is not paying Bob a salary, so Company A doesn’t have a CFO outflow for Bob’s wages; Company A’s CFO is higher.

#7

Schweser claims that exercising options will result in tax benefits for the company, and thus increase operating cash flow. Moreover, the books cites as the main reason for effect of stock options on CFO.

Maybe I am looking too much into this, but should I worry about this explanation, or just leave it be?

#8

I’d leave it be.

You can spend your time a lot more profitably on things that matter.