Stock Option Valuation
Many companies reward their employees with stock options or bonus shares, which are taxable on issuance or at exercise. Determining the appropriate value is critical when options are designed, granted, exchanged or repurchased. These options or bonus shares must be fairly valued to determine accurately the tax liability and avoid conflict with the IRS. The value of options must also be disclosed in proxy statements and financial statement footnotes.
Option pricing models estimate what an option would sell for in the market today (i.e., its fair market value) given the terms of the option and the underlying stock characteristics, including future expectations. The marketplace sets the value of publicly-traded stock, so the value of options to buy this stock can be readily calculated. However, if the company is closely held, stock compensation raises a valuation issue. First, the company’s value must be determined by performing detailed financial analysis of the company and of comparable publicly traded companies. Second, the value attributable to the option must be determined.
Traditionally, the Black-Scholes model is the preferred method for determining the value of an option for financial reporting and taxation purposes. The main assumption underlying the Black-Scholes model is that the underlying stock behaves in such a way that future price changes can be modeled by a probability distribution. These modeled future values, along with other variables, are then used to determine the option’s estimated fair market value. These variables include the:
- Underlying stock's value
- Exercise price of the option
- Underlying stock price volatility
- Dividend expected
- Risk-free interest rate for the option term remaining
- Time until expiration (or the expected life) of the options
Stock option valuations are complex problems requiring critical expert decisions. Every situation is unique, so every valuation should be treated with a fresh perspective using the latest market data. Adams Capital has the experience and credentials to make defensible assertions on the value of any type of stock option or bonus share.
To learn more about Stock Options, please browse through
the detailed pages below:
ISSUE
STOCK BASED COMPENSATION ISSUES
REGULATIONS AFFECTING THE ADMINISTRATION
OF
COMPANY SPONSORED STOCK OPTION
PLANS
WHY STOCK OPTION VALUATION IS
NECESSARY
CHEAP
STOCK ARTICLE
OPTION VALUATON
OPTION
VALUATION PROCESS
OPTION
PRICING MODELS
REQUEST
FOR INFORMATION
ADDITIONAL SERVICES
TECHNOLOGY
VALUATION SERVICES
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©Copyright 2005, Adams Capital, Inc.
Updated April 2005
Adams Capital, Inc. - Business Valuation Services
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