# Valuing Equity Options - (Financial Statement Analysis)



## Dominover (11 July 2011)

Would anyone know how to treat Equity Options mentioned in a companies financial statements?  Should I be valuing these or treating them like ordinary shares?  So far I haven't come across any books mentioning what to do with these.

Any books / article suggestions on this would be great.

Thanks very much.


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## Tysonboss1 (12 July 2011)

Dominover said:


> Would anyone know how to treat Equity Options mentioned in a companies financial statements?  Should I be valuing these or treating them like ordinary shares?  So far I haven't come across any books mentioning what to do with these.
> 
> Any books / article suggestions on this would be great.
> 
> Thanks very much.




Security analysis by Graham and Dodd.

You want to measure the dilution they are going to have, If they are small in number you can ignore them, otherwise probablly count them as ordinary shares but also add back the amount of capital the company will receive when they are issued.


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## Dominover (12 July 2011)

Tysonboss1 said:


> Security analysis by Graham and Dodd.
> 
> You want to measure the dilution they are going to have, If they are small in number you can ignore them, otherwise probablly count them as ordinary shares but also add back the amount of capital the company will receive when they are issued.




Brilliant.  Thanks very much.  I purchased the book online about an hour ago so will have some reading to do. 

Do you know where executive remuneration in the firm of stock options are recorded in an Australian Company's financial reports?   
Thanks.


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## Tysonboss1 (12 July 2011)

Dominover said:


> Brilliant.  Thanks very much.  I purchased the book online about an hour ago so will have some reading to do.
> 
> Do you know where executive remuneration in the firm of stock options are recorded in an Australian Company's financial reports?
> Thanks.




it will be in the annual report


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## Dominover (12 July 2011)

Tysonboss1 said:


> it will be in the annual report




Yes, I agree. There's a list of all the options in the anual report for several companies, though how is it tied back to the financial statements.  There seems to be nothing in there to indicate that this has been tied back to the financial statements such as the Statement of cash flows, P& L or balance sheet. 

That's what I'm trying to figure out.  There must be an accounting rule in Australia I'm not aware of or it could be the way they've worded it. When assessing a company's financial performance and valuing it, am I assuming that these are incorporated somewhere in the financial statements or should I treat them separately as mentioned in the first reply.  

Warren Buffet believes these should be expenses when issued as remuneration though I'm not sure Australia is aligning with that.  

Just wondering if someone could point me in the right direction.  

Thanks for the feedback so far. I really appreciate it.


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## Tysonboss1 (16 July 2011)

Dominover said:


> Yes, I agree. There's a list of all the options in the anual report for several companies, though how is it tied back to the financial statements.  There seems to be nothing in there to indicate that this has been tied back to the financial statements such as the Statement of
> 
> 1, cash flows,
> 2, P& L or
> 3,balance sheet.




1, It wouldn't affect the cash flows until the option is exercised. at which point the funds recieved would appear under the financing cashflows

2, It wouldn't affect the P+L

3, Upon exercise of the rights the cash recieved would appear on the balance sheet.


Options don't affect the profit of the company, All they do is

1, dilute you if they are exercised cheaper than the intrinsic value of the company
2, improve your position if they are exercised much higher than intrinsic value.


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## ginar (16 July 2011)

Dominover said:


> Brilliant.  Thanks very much.  I purchased the book online about an hour ago so will have some reading to do.
> 
> Do you know where executive remuneration in the firm of stock options are recorded in an Australian Company's financial reports?
> Thanks.




All options and stocks listed and unlisted will be listed in appendix 3b announcements


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## ginar (16 July 2011)

Dominover said:


> Would anyone know how to treat Equity Options mentioned in a companies financial statements?  Should I be valuing these or treating them like ordinary shares?  So far I haven't come across any books mentioning what to do with these.
> 
> Any books / article suggestions on this would be great.
> 
> Thanks very much.




Not sure its that relevant these days but i remember in late 90's that escrowed shares were a big issue valuing certain companies . when they come out of the woodwork doesnt that dilute a companies value especially for those who arent aware of them


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## McLovin (19 July 2011)

ginar said:


> Not sure its that relevant these days but i remember in late 90's that escrowed shares were a big issue valuing certain companies . when they come out of the woodwork doesnt that dilute a companies value especially for those who arent aware of them




It doesn't really dilute the value of the company, because the shares were already issued, they just couldn't be traded. It may lead to some overhang in the stock if a significant number of shares come out of escrow in one go. But then you should also be asking why the market is worried all those escrowed shares are going to be sold off by management.


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## Tysonboss1 (19 July 2011)

McLovin said:


> It doesn't really dilute the value of the company, because the shares were already issued, they just couldn't be traded. It may lead to some overhang in the stock if a significant number of shares come out of escrow in one go. But then you should also be asking why the market is worried all those escrowed shares are going to be sold off by management.




I tend to aggree with Mc Muffin.


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