Discounted Cash Flow Valuations
Aswithemployeeoptions,therearethreedimensionsalong
whichrestrictedstockissuescanaffectvalue.Restrictedstock
issuesinthepastwillcreateanoverhangofrestrictedstock
thatcanaffect thevaluepernonrestrictedshare. Restricted
stockissuestocompensateemployeesinthecurrentyearwill
reduce current earnings, because they are compensation
expenses.Expectedrestrictedstockissuesinthefuturewill
reduce future earnings and cash flows.
- Restrictedstockissuesin thepast.Restrictedstock
issuesinthepastwillbereflectedinthenumberof
shares outstanding at a firm at any point in time.
Thus, assume that a firm has issued 20 million
restrictedstock issuesover thepast fiveyears and
thattheyremain restricted.Inaddition,assume that
thisfirmhas 80 millionunrestrictedsharestradingin
themarket todayas conventional shares.The firm
willreporthaving 100 millionsharesoutstanding,but
the shares are not equivalent. In particular, as we
noted in the preceding section, restricted shares
should be less valuable than unrestricted shares.
Thus,iftheoverallvalueofequityis$1billion,the
restrictedsharesshouldhavevalueslessthan$10and
the unrestricted shares should have values greater
than $10. - Restricted stock issues in the current year. The
argumentsweusedfortreatingemployeeoptionsas
compensation expense apply just as strongly for
restrictedstock. Thus, thevalueof restrictedstock
(allowingfortheilliquiditydiscount)grantedinthe
current yearto employees should be treatedas an