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More About This Title Valuing Employee Stock Options + CD
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Due to the new requirements of the Proposed Statement of Financial Accounting Standards (FAS 123) released by the Financial Accounting Standards Board (FASB)-namely the fact that employee services received in exchange for equity instruments be recognized in financial statements-companies are now scrambling to learn how to value and expense employee stock options (ESOs). Based on author Dr. Johnathan Mun's consulting and advisory work with the FASB consulting projects with several Fortune 500 firms, Valuing Employee Stock Options provides readers with a comprehensive look at this complex issue.
Filled with valuable information on binomial lattice and closed-form modeling techniques, Valuing Employee Stock Options can help financial professionals make informed decisions when attempting to ascertain the fair-market value of ESOs under the new requirements.
Johnathan Mun, PhD, MBA, MS, CFC, FRM (San Francisco, CA), is Vice President of Analytical Services at Decisioneering, Inc., the makers of Crystal Ball analytical software. He is also the author of Applied Risk Analysis (0-471-47885-7), Real Options Analysis (0-471-25696-X), and Real Options Analysis Course (0-471-43001-3), all of which are published by Wiley.
English
English
List of Figures and Tables xi
Preface xv
Acknowledgments xvii
About the Author xix
PART ONE Impacts of the New FAS 123 Methodology
CHAPTER 1 Implications of the New FAS 123 Requirements 3
A Brief Introduction 3
An Executive Summary of the FAS 123 Valuation Implications 5
Summary and Key Points 8
CHAPTER 2 The 2004 Proposed FAS 123 Requirements 11
FAS 123 Background 11
Summary and Key Points 17
CHAPTER 3 Impact on Valuation 19
A Brief Description of the Different Methodologies 19
Selection and Justification of the Preferred Method 19
Application of the Preferred Method 21
Technical Justification of Methodology Employed 22
Options with Vesting and Suboptimal Behavior 26
Options with Forfeiture Rates 28
Options Where Risk-Free Rate Changes over Time 29
Options Where Volatility Changes over Time 32
Options Where Dividend Yield Changes over Time 32
Options Where Blackout Periods Exist 35
Summary and Key Points 39
CHAPTER 4 Haircuts on Nonmarketability, Modified Black-Scholes with Expected Life, and Dilution 41
Nonmarketability Issues 41
Expected Life Analysis 45
Dilution 49
Summary and Key Points 49
CHAPTER 5 Applicability of Monte Carlo Simulation 51
Introduction to the Analysis 51
The Black-Scholes Model 52
Monte Carlo Path Simulation 52
Applying Monte Carlo Simulation to Obtain a Stock Options Value 53
Binomial Lattices 53
Analytical Comparison 54
Applying Monte Carlo Simulation for Statistical Confidence and Precision Control 54
Summary and Key Points 64
CHAPTER 6 Expense Attribution Schedule 65
ESO Expense Attribution Schedule as Minigrants 65
Summary and Key Points 73
PART TWO Technical Background of the Binomial Lattice and Black-Scholes Models
CHAPTER 7 Brief Technical Background 77
Black-Scholes Model 77
Monte Carlo Simulation Model 79
Binomial Lattices 80
Summary and Key Points 81
CHAPTER 8 Binomial Lattices in Technical Detail 83
Options Valuation: Behind the Scenes 83
Binomial Lattices 87
The Look and Feel of Uncertainty 90
A Stock Option Provides Value in the Face of Uncertainty 92
Binomial Lattices as a Discrete Simulation of Uncertainty 94
Solving a Simple European Call Option Using Binomial Lattices 99
Granularity Leads to Precision 102
Solving American and European Options with Dividends 105
Customizing the Binomial Lattice 108
The Customized Binomial Lattice Model 109
Treatment of Forfeiture Rates 112
Summary and Key Points 115
Appendix 8A—Binomial, Trinomial, and Multinomial Lattices 115
CHAPTER 9 The Model Inputs 119
Stock and Strike Price 119
Time to Maturity 120
Risk-Free Rate 120
Dividend Yield 121
Volatility 121
Logarithmic Stock Price Returns Approach 121
Annualizing Volatility 123
GARCH Model 123
Market Proxy Approach 124
Implied Volatilities Approach 125
Vesting 125
Suboptimal Exercise Behavior Multiple 126
Forfeitures 127
Blackout Periods 128
Lattice Steps 128
Summary and Key Points 129
PART THREE A Sample Case Study Applying FAS 123
CHAPTER 10 A Sample Case Study 133
Stock Price and Strike Price 133
Maturity 135
Risk-Free Rates 136
Dividends 136
Volatility 136
Vesting 140
Suboptimal Exercise Behavior Multiple 141
Forfeiture Rate 145
Number of Steps 145
Results and Conclusions 147
Summary and Key Points 157
Appendix 10A—Introduction to the Software 158
Getting Started 158
ESO Toolkit 158
ESO Functions 161
Auditing Templates and Spreadsheets 164
PART FOUR Options Valuation Results Tables
APPENDIX Getting Started with the Options Valuation Results Tables 169
Thirty-Five Percent Volatility and 3-Year Maturity ESOs with Varying Stock Price, Suboptimal Behavior, Vesting Period, and Forfeiture Rates 171
Seventy Percent Volatility and 3-Year Maturity ESOs with Varying Stock Price, Suboptimal Behavior, Vesting Period, and Forfeiture Rates 179
Thirty-Five Percent Volatility and 5-Year Maturity ESOs with Varying Stock Price, Suboptimal Behavior, Vesting Period, and Forfeiture Rates 187
Seventy Percent Volatility and 5-Year Maturity ESOs with Varying Stock Price, Suboptimal Behavior, Vesting Period, and Forfeiture Rates 199
Thirty-Five Percent Volatility and 7-Year Maturity ESOs with Varying Stock Price, Suboptimal Behavior, Vesting Period, and Forfeiture Rates 211
Seventy Percent Volatility and 7-Year Maturity ESOs with Varying Stock Price, Suboptimal Behavior, Vesting Period, and Forfeiture Rates 227
Thirty-Five Percent Volatility and 10-Year Maturity ESOs with Varying Stock Price, Suboptimal Behavior, Vesting Period, and Forfeiture Rates 243
Seventy Percent Volatility and 10-Year Maturity ESOs with Varying Stock Price, Suboptimal Behavior, Vesting Period, and Forfeiture Rates 267
Glossary 291
Notes 295
About the CD-ROM 301
Index 305
