Aswath Damodaran 530
From Equity Value to Equity Value per share: The Effect of
Options
! When there are warrants and employee options outstanding, the estimated
value of these options has to be subtracted from the value of the equity, before
we divide by the number of shares outstanding.
! There are two alternative approaches that are used in practice:- One is to divide the value of equity by the fully diluted number of shares
outstanding rather than by the actual number. This approach will underestimate the
value of the equity, because it fails to consider the cash proceeds from option
exercise. - The other shortcut, which is called the treasury stock approach, adds the expected
proceeds from the exercise of the options (exercise price multiplied by the number
of options outstanding) to the numerator before dividing by the number of shares
outstanding. While this approach will yield a more reasonable estimate than the
first one, it does not include the time value of the options outstanding.