A comprehensive guide to understanding the implications andapplications of valuing employee stock options in light of the newFAS 123 requirements Due to the new requirements of the Proposed Statement of FinancialAccounting Standards (FAS 123) released by the Financial AccountingStandards Board (FASB)-namely the fact that employee servicesreceived in exchange for equity instruments be recognized infinancial statements-companies are now scrambling to learn how tovalue and expense employee stock options (ESOs). Based on authorDr. Johnathan Mun's consulting and advisory work with the FASBconsulting projects with several Fortune 500 firms, ValuingEmployee Stock Options provides readers with a comprehensive lookat this complex issue. Filled with valuable information on binomial lattice andclosed-form modeling techniques, Valuing Employee Stock Options canhelp financial professionals make informed decisions whenattempting to ascertain the fair-market value of ESOs under the newrequirements. Johnathan Mun, PhD, MBA, MS, CFC, FRM (San Francisco, CA), is VicePresident of Analytical Services at Decisioneering, Inc., themakers of Crystal Ball analytical software. He is also the authorof 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.
Autorentext
JOHNATHAN MUN is Vice President of Analytical Services at Decisioneering, Inc., the makers of Crystal Ball® analytical software. His duties focus primarily on heading up the development of real options and financial analytics software powered by Crystal Ball. Prior to joining Decisioneering, he was a consulting manager and financial economist in the Valuation Services and Global Financial Services practice of KPMG Consulting, and a manager with the Economic Consulting Services practice at KPMG LLP. He holds a PhD in finance and economics, and an MBA and MS in management. Mun is also certified in financial risk management and in financial consulting. He is currently a visiting professor in finance, economics, and statistics at various universities, including the University of Applied Sciences (Germany), the Swiss School of Management (Switzerland), and Golden Gate University (California). Mun is the author of Applied Risk Analysis, Real Options Analysis, and Real Options Analysis Course, all published by Wiley. He continues to offer worldwide seminars and lectures on the topics of real options, simulation and risk analysis, and corporate finance.
Klappentext
Praise for VALUING EMPLOYEE STOCK OPTIONS
"Veritas has modeled the valuation of its employee stock options for analytical purposes using a proprietary customized binomial lattice developed by Dr. Johnathan Mun. The valuation based on the customized binomial lattice model allows us to take into account the impacts of multiple vesting periods, employee suboptimal exercise behavior, forfeiture rates, changing risk-free rates, and changing volatilities over the life of the option. . . . The customized binomial lattice model resulted in a considerably lower expense, considering the expensing guidelines included in the FAS 123."
Don Rath, Vice President, Tax and Stock Administration, Veritas Software Corporation
"This is one of those rare books written in anticipation of a major shift in the industry and economy. FAS 123 will throw a lot of public companies into a frenzy . . . the smart ones are identifying the opportunity to master the process and take over the driver's seat. The methodology and the tools developed by Dr. Johnathan Mun are proven, pragmatic, and offer a great deal of value and benefit to those early adopters."
Dr. Markus Junginger, Managing Partner, IBCOL Consulting
"After extensive review of the FASB exposure draft and consideration of a variety of option valuation methodologies, E*TRADE FINANCIAL has decided to implement a binomial lattice model in Equity Edge, our stock plan management and reporting software. We found Dr. Mun's work on employee stock option pricing very valuable."
Naveen Agarwal, Director, Product Management, E*TRADE FINANCIAL Corporation
Zusammenfassung
A comprehensive guide to understanding the implications and applications of valuing employee stock options in light of the new FAS 123 requirements
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.
Inhalt
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…