toconsiderthepotentialtaxbenefitevenwhenoptions are
out-of-the-money.
Nowthattheaccountingruleshavechangedtoforceoption
expensing,itseemstousonlyamatteroftimebeforethetax
ruleschangeaswelltomatch.Ifthatdoeshappen,wewillbe
ableto expenseoptiongrantsin theperiodswhentheyare
madeandwewillnolongerneedtotaxeffecttheexisting
options(sincethetaxsavingswouldhaveaccruedwhenthe
options were granted).
Nontraded Firms
A couple of key inputs to the option pricing model—the
current price per share and the variance in stock
prices—cannotbeobtainedif afirmisnotpublicly traded.
Therearetwochoicesinthisscenario.Oneistoreverttothe
treasurystockapproachtoestimatethevalueoftheoptions
outstandingandabandontheoptionpricingmodels.Theother
istostaywiththeoptionpricingmodelsandtousethevalue
persharefromthediscountedcashflowmodel.Thevariances
of similar firms that are publicly traded can be used to
estimate the value of the options.
Option Pricing Models
Withalloftheseissuesaffectingvaluation,howdoweadapt
conventional option pricing models to value employee
options?Thisquestionhasbeenaddressedbothbyacademics
whovalueoptionsandbytheFASBinitsattemptstogive
guidance to firms that have to value these options for
expensing.