Question

Please use the following information to answer
Q1 &2
You are valuing the stock of GE. Using a free cash flow to equity (FCFE) model, you estimate that GE’s equity has a total value of $380 billion and the company has 10.57 billion shares outstanding. The company also reports 1.6 billion employee options outstanding, of which 1.0 billion are currently vested. The average exercise price of the options is $25.
1.Estimate the per share equity value for GE using the Fully-Diluted method to account for employee stock options.

2.Estimate the per share equity value for GE using the Treasury Stock method to account for employee stock options.

Answer 1

1. Estimate the per share equity value for GE using the Fully-Diluted method to account for employee stock options.

Per share equity value for GE using the Fully-Diluted method to account for employee stock options

= Total value of equity of GE / (Number of shares outstanding + Number of employee options outstanding)

= $380 billion / (10.57 billion + 1.6 billion)                      

= $380 billion / (12.17 billion)

= $31.22

Therefore per share equity value for GE using the Fully-Diluted method to account for employee stock options is $31.22.

2. Estimate the per share equity value for GE using the Treasury Stock method to account for employee stock options.

Assume that all the employee stock options are in-the-money stock option because Treasury Stock method includes only in-the-money options in per share value calculation.

The per share equity value for GE using the Treasury Stock method to account for employee stock options

= (Total value of equity of GE + value of stock option)/ (Number of shares outstanding + Number of employee options outstanding)

Where value of employee stock option = Number of employee options outstanding * average exercise price of the options

= 1.6 billion * $25

= $40 billion

Therefore,

The per share equity value for GE using the Treasury Stock method to account for employee stock options

= ($380 billion + $40 billion)/ (10.57 billion + 1.6 billion)   

=$420 billion / (12.17 billion)

=$34.51

Therefore per share equity value for GE using the Treasury Stock method to account for employee stock options is $34.51.