operating expense and should reduce the current
year’s operating and net income.- Expected restricted stock issues in the future.
Expectedrestrictedstockissuesinthefuturearean
operatingexpenselineitem.Aswithoptions,thebest
waytoestimatethelineitemistocomputethevalue
ofrestrictedstockgrantedeachyearasapercentof
revenueshistoricallyandthenforecastthisvaluefor
futureyears. This willreduceexpectedfuturecash
flows and, by extension, the value per share today.
Insummary,thetreatmentofrestrictedstockissuesmirrors
the treatment of employee options with the one obvious
qualifier.Therearefewervaluationissuesrelatedtovaluing
restrictedstockthanoptions,atleastforpubliclytradedfirms.
Theonlyrealdebateisaboutthesizeofthediscounttobe
attached to the stock price.
Relative Valuation
Since accountants have typically adjusted the number of
sharesoutstanding forrestrictedstock outstanding,analysts
havegenerallyhadaneasiertimeincorporatingtheeffectof
restricted stock into relative valuation. The one potential
problemthatisoftenoverlookedisthatrestrictedsharesadd
tothesharecountjustlikeregularsharesbuttheyshouldhave
lowervalues(becauseofilliquidity).Asaconsequence, we
arelikelytooverstateallmultiplesforfirmswithsubstantial
restricted stock outstanding.
To see why, note that any multiple (equity or enterprise
value)hasthemarketcapitalizationasoneoftheingredients
in thenumerator. Theconventional computation ofmarket