capitalization willalmost always eliminatethe bias in the
comparison process.
ILLUSTRATION 11.4: Adjusting P/E Ratio for Options
Outstanding
Consider Cisco and Google, twocompanies forwhich we
estimatedthevalueofoptionsoutstandinginIllustration11.3.
Inthefollowingtable,weestimatetheconventionalP/Eratio
andcontrastitwiththeadjustedP/Eratio,usingtheapproach
described earlier:
In making the adjustments to net income for option
expensing,weusetheinformationprovidedbythefirmsin
theirfinancialstatementstoestimateproformaincome.Cisco
reported$1,628millioninemployeeoptionexpensesforthe
current year, thus creating an after-taxexpense of $1,029
million.This issubtractedfrom thestatednetincome. For
Google, wehadto improvisesincethenetincome number
usedwasbasedontrailing12-monthdata(throughJune30,
2005)andtheemployeeoptionadjustmentisavailableonly
for the last financial year (ending December 31, 2004).
Googlereportsanadjustmenttonetincomeof$15millionin
after-taxtermsforthe 2004 fiscalyearincome.Wehadmade