In the example above we have assumed that the options

In the example above, we have assumed that the options do not provide any
tax advantages. To the extent that the exercise of the options creates tax
advantages, the actual cost of the options will be lower by the tax savings.

One simple adjustment is to multiply the value of the options by (1- tax rate)
to get an after-tax option cost.

Aswath Damodaran 211
Option grants in the future…

Assume now that this firm intends to continue granting options each year to its
top management as part of compensation. These expected option grants will
also affect value.

The simplest mechanism for bringing in future option grants into the analysis
is to do the following:
• Estimate the value of options granted each year over the last few years as a percent
of revenues.
• Forecast out the value of option grants as a percent of revenues into future years,
allowing for the fact that as revenues get larger, option grants as a percent of
revenues will become smaller.
• Consider this line item as part of operating expenses each year. This will reduce the
operating margin and cashflow each year.

Aswath Damodaran 212
When options affect equity value per share the most…

Option grants affect value more
• The lower the strike price is set relative to the stock price
• The longer the term to maturity of the option
• The more volatile the stock price

The effect on value will be magnified if companies are allowed to revisit
option grants and reset the exercise price if the stock price moves down.

Aswath Damodaran 213
Valuations
Aswath Damodaran

Aswath Damodaran 214
Companies Valued
Company Model Used Key emphasis
1. Con Ed Stable DDM Stable growth inputs; Implied growth
2a. ABN Amro 2-Stage DDM Breaking down value; Macro risk?
2b. Goldman 3-Stage DDM Regulatory overlay?
2c. Wells Fargo 2-stage DDM Effects of a market meltdown?
2d. Deutsche Bank 2-stage FCFE Estimating cashflows for a bank
3. S&P 500 2-Stage DDM Dividends vs FCFE; Risk premiums
4. Tsingtao 3-Stage FCFE High Growth & Changing fundamentals
5. Toyota Stable FCFF Normalized Earnings
6. Tube Invest. 2-stage FCFF The cost of corporate governance
7. KRKA 2-stage FCFF Multiple country risk..
8. Tata Group 2-stage FCFF Cross Holding mess
9. Amazon.com n-stage FCFF The Dark Side of Valuation…
10. Amgen 3-stage FCFF Capitalizing R&D