thesameadjustmenttothetrailing12-monthearnings,though
the actual adjustment will probably be higher.
Future Option Grants and Effect on Value
Whileexistingoptions actasa dragonvalue,theyarebut
partoftheproblem.Firmsthathaveissuedoptionsinthepast
willprobablycontinueto keepusingtheminthefuture.In
this section, the argument for why these expected future
optionissuesaffectvalueandhowtoincorporatetheseeffects
into value is presented.
Why Future Option Issues
AffectValueJustasoptionsoutstandingrepresentpotential
dilution or cash outflows to existing equity investors,
expectedoptiongrantsinthefuturewillaffectvaluepershare
by increasing the number of shares outstanding in future
periods.
- The simplest way of thinking about this expected
dilution is to consider the terminal value in the
discounted cash flow model. When valuing a
company,theterminalvalueisestimatedatapointin
timeinthefuture,isdiscountedtothepresent,andis
thendividedbythesharesoutstandingtodaytoarrive
at the value per share. However, expected option
issuesinthefuturewillincreasethenumberofshares
outstandingintheterminalyear,andthereforereduce
the portion of the terminal value that belongs to
existing equity investors. - Analternate wayofconsidering whyfutureoption
grants affect value is to treat them as employee