Answer 25

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Read more about option effects on value

If the firm has issued no equity options (to management as compensation or the market in the form of convertibles or warrants), you can divide by the number of shares and you should have the value of equity per share. If the firm has issued equity, it is best to value these equity options as options (rather than at exercise value), to subtract the value of equity options from the overall value of equity and then divide by the actual number of shares outstanding. The practice of using diluted shares that many analysts use as an alternative is a blunt instrument for dealing with options since there is no way to discriminate between options that are in the money to differing degrees.

What about expected stock issues in the future? If you do your DCF valuation right, they should already be incorporated into your present value. After all, you make equity issues to either cover negative cashflows in the future (and the present value of these negative cashflows will reduce the value today) or to change your financing mix (in which case your cost of capital in future years will change as the debt ratio changes).



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