1 While it may seem logical to add back the expenses
associatedwithnewoptiongrantstonetincome(especiallyin
theaftermathof thenewFASB123R), wedonot thinkit
makes senseto doso. Theseexpenses arefor the current
period,whereastheoptionsbeingaddedbacktothevalueof
equity reflect all options granted historically that are still
outstanding.
2 Toseewhy,notethatthestockpricewillbedepressedmore
when there are millions of deep in-the-money options
outstanding thanwhen theseoptions are out-of-the-money.
Dividing the price by the diluted earnings per share will
therefore yield a lower P/E ratio and a stock that looks
cheaper.
3 Goodwillcanalsobearepositoryforsynergy,control,and
overpayment, thus making it an imperfect measure of
acquired company growth assets.
4 The mean and the standard deviation are the summary
statistics that are most likely to be affected by these outliers.
5 Toseewhy,assumethattheearningspershareiscurrently
$1 andis expectedto doubleto $2 nextyearand grow 4
percent a year for the followingfour years. The expected
growthrateover thenextfiveyears willbe18.53percent,
largelybecauseoftheexpectedgrowthnextyear.Ifweuse
theforwardearningspershareof$2tocomputetheP/Eratio
andproceedtodividebytheexpectedgrowthrateof18.53
percent (to arrive at a low PEG ratio), we have double
counted next year’s growth.