Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

Adjusted pretax operating income

$5,786

million

If we use this pretax operating income as our base for
forecasting future operating income, we areassuming that
employeeoptiongrantswillcontinueintothefutureandthat
thevalueofthesegrantsasapercentofrevenueswillremain
atthisyear’slevelof6.56percent.Sincethisishighrelative
to the peer group (where the average option grants as a
percent of value is closerto 3 percent), we assumed that
option grants as a percent of revenueswill decrease from
existing levels to 3 percent over the next 10 years.
27 Moreimportantly,failingtoadjusttheoperatingincome
for employee option expenses will result in income, cash
flows,and valueall beingoverstated.In fact,thevalue of
equitywouldbeoverstatedbyalmost$24billionifweused
thestatedoperatingincomeforourcalculations.Google,in
turn,reported$1,433millioninpretaxoperatingincomefor
thefourquartersendedJune30,2005.LikeCisco,itdoesnot
expense employee option grants in the current year, but,
unlikeCisco,itdoesshowtheexpensesofoptionexerciseas
an operatingexpense. Theadjustmenttogetto thecorrect
operating income is therefore a little more complicated:

Stated pretax operating income

$1,433

million

+ Expenses from option exercise considered $ 264 million

Fair market value of options granted during

year

$ 286 million

Adjusted pretax operating income

$1,411

million