Valuation Techniques: Discounted Cash Flow, Earnings Quality, Measures of Value Added, and Real Options

FOOTNOTE DISCLOSURE

Note that the option footnote presents five basic sets of information. First, it provides information on the terms of the options. For example, it notes that there are two option plans—one for executives and one for nonexecutive employees (the broad-based plan). In terms of the tax treatment of the options, the broad-based plan is limited to nonqualified options; the executive plan includes both nonqualified options and incentive stock options. Dell’s options typically have a 10-year maturity and vest over 5 years. That information will be useful in estimating the value of the options.

Second, it provides information on the option granting, exercise, and cancellation behavior in previous years. For example, it shows that 344 million options were outstanding at the beginning of 2002, 126 million more were granted, 63 million were exercised, and 57 million were canceled, leaving 350 million outstanding at year-end.6 Given 2,602 million total shares outstanding at year-end, optioned shares represent 13.5 percent of shares outstanding. In addition, it shows the average exercise prices of each group of options. For example, it shows that the options granted during 2002 were at an average strike of $23.24 and those that were exercised were at a strike of $3.11, indicating that the share price increased about 647 percent on average since those options were granted. In addition, options canceled had an exercise price of $32.86, indicating that most were out of the money ...