Our in house method of accounting for stock options

Burlington Northern Santa Fe has the following stock option characteristics:-



We do the following calculation to determine the liability on the balance sheet for shareholders due to the stock options:-

=[10,020 * (our objective value – 68.24)] + [ ((2,500*5)*(our objective value – 68.24)]

The first part determines the cost to the shareholder assuming all stock options are excised at our objective value.

The second part assumes new stock options in the next five years will be issued and they will also be exercised at today’s estimated objective value. NOTE: strike price was taken to also be 68.24 USD/share as this was the approx. price of the stock prior to Buffett´s bid for the whole company).

= 720 million USD liability

For 2009, Burlington Northern Santa Fe inputed a compensation cost of 41 million USD through their income statement: 69 million USD in 2008.

We appreciate many could see this as an aggressive number.

We do not assume anyone forfeits their options nor that people will exercise at lower prices. However, we are conservative investors – hence we must be aggressive counters of costs.


Sincerely,

Alessandro Sajwani