Stock-Options Valuations

Stock-Options Valuations

Business valuation written in a document and business charts.

Stock options remain popular devices for rewarding employees. it is critical to fairly value options to accurately determine any tax liability and avoid conflict with the IRS. A Stock Option Business Valuation estimates what an option would sell for in the open market. The stock market sets the price of publicly traded stock, so it is simple to value options to purchase these shares. Closely held companies present greater difficulties. The analyst must determine the company's value by performing detailed financial analysis of the company and comparing it to comparable publicly traded companies. Then the value of the accompanying option must be determined.

The stock options are valued by considering the following:

  • Value of the underlying stock
  • Expected dividend
  • Underlying stock price volatility
  • Exercise price of the option
  • Time until the options expire
  • Risk-free interest rate for the remaining option term

The valuator must consider many complex factors in valuing stock options. Several different formulas have been devised over the years with which to value stock options. The Black-Scholes and binomial models are the two most commonly utilized. Differing circumstances determine which formula is most appropriate. Every company is unique and requires expert experience and analysis using the latest economic and market information.

Read our article on Valuation of Stock Options.