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ESO Plan

Incorporate an ESO plan into a company's valuation.

For your company (Dell, Inc), incorporate the effect of the Employee Stock Option (ESO) plan into the common equity valuation. Be sure to consider both the forecasted ESO grants and outstanding ESOs. Perform your valuation in Excel; use appropriate formulas/equations.

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Incorporate an ESO plan into a company's valuation.

For your company (Dell, Inc), incorporate the effect of the Employee Stock Option (ESO) plan into the common equity valuation. Be sure to consider both the forecasted ESO grants and outstanding ESOs. Perform your valuation in Excel; use appropriate formulas/equations.

Employee Stock Option Plan
Discussion of basic concepts

Employee Stock Option Plan, is a mechanism by which employees of a particular company are entitled to buy, at a 'fair' value, the stock of the company they work for. Thus it is an option to buy the company's share at a certain price. This price which could be the market price or some other price. Normally, to make an ESOP attractive, the option price is lower than the market price.

The option to acquire shares is generally exercisable over a period of time, known as vesting period. Since options lapse if the employee leaves employment before the vesting period is over, ESOPs work as an incentive for the employee to stick around for that time

ESOPs are a good motivation tools. The knowledge that if he does well, the company will prosper and eventually the shares will yield a higher return motivates the employee to put in more efforts. This has a multiplier effect since with highly motivated employees, the chances of the company doing well are extremely high. It helps in increase in Efficiency, productivity increases & profits rise.

ESOP entitlements are usually vested with an employee to be exercised in equal portions over a period two to five years in the hope that the employee will stay with the company to through this period. The shares once bought can be sold on the local market at any time.

Risks of ESOPs to the company
Dilution of equity
When ESOPs are exercised, it leads to a further issue of equity shares of the company. This means that the equity of the company is being diluted further and has an adverse effect on the EPS (Earning Per Share).

Lack of transparency
The limitation of ESOP is that it may not be transparent and moreover it may hurt the interest of existing investors. They can question, why employees should be given a stake in the company at less than fair market value, i.e. the capital of the company grows disproportionately to its market worth.

This argument gains credence with the growing phenomenon of top level managers making just the right noises to woo the market, without seeing the best interest of the company. They get into mergers and partnerships for no real reasons except to boost the stock price. They spin off profitable ventures and list them simply to increase the ...

Solution Summary

For your company (Dell, Inc), incorporate the effect of the Employee Stock Option (ESO) plan into the common equity valuation. Be sure to consider both the forecasted ESO grants and outstanding ESOs. Perform your valuation in Excel; use appropriate formulas/equations.

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