thevalueoftheequitytoreflecttheexpectedproceedsfrom
the option exercise. The last approach values the options
outstandingat fairvaluerather thanatexercise value,and
subtractsthisfromtheoverallvalueofequitytoarriveatthe
valueof equityin commonstock. Webelievethatthelast
approach is the only one that completely incorporates the
effect of existing options into value per share.
UsingFullyDilutedNumberofSharestoEstimatePer-Share
Value
The simplest way to incorporate the effect of outstanding
optionsonvaluepershareistodividetheestimatedvalueof
equityfromadiscountedcashflowmodelbythenumberof
shares thatwill be outstandingif all options areexercised
today—the fully diluted number of shares. While this
approachhasthevirtueofsimplicity,itwillleadtotoolowan
estimate of value per share for three reasons:
1.Itconsidersalloptionsoutstanding,notjustonesthatare
in-the-moneyandvested.Tobefair,therearevariantsofthis
approachwherethesharesoutstandingareadjustedtoreflect
only in-the-money and vested options.
- It does not incorporate the expected proceeds from
exercise, which will comprise a cash inflow to the firm.
3.Finally,thisapproachdoesnotbuildthetimepremiumon
the options into the valuation.
ILLUSTRATION11.1:FullyDilutedApproachtoEstimating
Value per Share