Valuation of employee stock options (ESOs)

We introduce the reporting requirements of FAS 123R, the accounting rules that govern the expensing of employee stock options (ESOs). In less than an hour, you will understand the scope of FAS 123, the “hierarchy” of option costing methods, the inherent flaw of diluted EPS, and the usefulness of stock option overhang. We show how you can estimate overhang in a manner similar to the most sophisticated institutional advisory firms. Finally, we make the theory real by estimating the option expense of a recent option grant at Yahoo (ticker: YHOO.

(50 min.)