Notethat thevalueper shareusingthis approachishigher
thanthevaluepershareusingthefullydilutedapproachfor
bothcompanies.ThedifferenceisgreatestforCiscobecause
theaverageexercisepriceishighrelativetothecurrentstock
price. For Google, the effect is much smaller since the
exercisepriceiswellbelowthecurrentstockprice(ofalmost
$300).Theestimated valueper sharestill ignoresthetime
value of the options.
Aswiththedilutedapproach,therearemodifiedversionsof
this approach where only in-the-money options are
considered. Thiswill reducethevalue per share forCisco
considerably since the average exercise price for the
in-the-money options is much lower than the weighted
average exercise price of $25.02.
Valuing Options
Thecorrectapproachtodealingwithoptionsistoestimatethe
valueoftheoptionstoday,giventoday’svaluepershareand
thetime premiumontheoption.Once thisvalue hasbeen
estimated,itissubtractedfromtheestimatedequityvalueand
dividedbythenumberofsharesoutstandingtoarriveatvalue
per share.
Inthissubsection,weconsiderboththemeasurementissues
associatedwithvaluingemployeeoptionsandthemodelsthat
have been developed to value them.
Measurement Issues