Question #19
Reading: Reading 9 Employee Compensation - Post-Employment and Share-Based
PDF File: Reading 9 Employee Compensation - Post-Employment and Share-Based.pdf
Page: 7
Status: Incorrect
Correct Answer: A
Your Answer: B
Question
For forecasting the dilution from future grants of share-based compensation and its effects on valuation, which of the following approaches is least appropriate?
Answer Choices:
A. Add share-based compensation expense estimates to free cash flow estimates and increase the number of shares outstanding based on the same estimates
B. Deduct share-based compensation expense from estimates of free cash flows and ignore dilution
C. Discount the estimated value of equity by a dilution factor
Explanation
Free cash flows are already estimated by adding share-based compensation, so adding
them again would be incorrect. The dilution from future grants can be addressed by
discounting the estimated value of equity by a dilution factor or by estimating an increase
in the number of shares outstanding. Alternatively, we can just deduct share-based
compensation expense from estimates of free cash flows and not worry about forecasting
dilutive shares.