8 To provide an illustration, suppose a firm assumes a
forfeiture rate of 3 percent and estimatesthevalue of the
optionswhentheyaregrantedat$10million;theannualcost
eachyearoverafive-yearvestingperiodwillbe$2milliona
year.Ifayearlatertheforfeiturerateisrunningat 2 percent,
the firmwill haveto revalue theoptions using the actual
forfeiturerateandadjustthecompensationthatyeartoreflect
the change.
92004 EarningsImpactofStockOptionsontheS&P 500 and
NASDAQ 100 Earnings, Bear Stearns Equity Research
publication, March 21, 2005.
10 TheBearStearnsstudylooksattheeffectofforcingoption
expensingonallcompaniesandcomesupwitha 5 percent
dropinnetincomeatS&P 500 companiesand 22 percentat
technology companies. However, it also notes that some
companies had already switched to expensing options in
2003.Thenumberswereportincludetheoptionexpensesat
those companies as well and are thus larger.
11 For example, assume that we arevaluing Coca-Cola, a
company that has been expensingemployee options since
2003.Ifweuseearningsin 2004 asourbaseyearandapply
an expectedgrowth ratetoit,weareassuming thatoption
expenseswillcontinueasalineitemintothefutureandthatit
willremainatthesamepercentageofrevenuesitwasatin
2004.
12 Thesewereconventionaldiscountedcashflowvaluations.
Details of thevaluations can be obtained on my web site
(www.damodaran.com).