How to Revalue Stock Options
According to the SEC, companies use stock options to attract, compensate, and retain employees. Companies that heavily rely on knowledge workers spend large amounts of money to hire and train their employees. Keeping these valuable team members become vital to the firm's success. The employees who receive these stock options work hard so that the price of the stock increases above the strike price, which is the price an employee would pay for the stock. A business will move forward to revalue these stock options when the underlying stock price has dropped to an extent that exercising the stock option appears extremely unlikely.
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Instructions
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1
Use the intrinsic value method to revalue the stock options. Other methods exist but they become extremely complicated, because they depend on detailed financial modeling, such as profitability and the statistical probability of the future success of the business.
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2
Find the underlying company's stock price. Use the stock option contract to obtain the number of shares granted. As an example, say the option contract represents 100 shares with a strike price of $50, and the stock now trades for $15. Subtract the strike price from the current price and then multiply that answer by the number of shares ($15 - $50) = -$35 x 100 shares = -$3,500. This value emerges as a large negative number and thus the reason to revalue the options.
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3
Find the new strike price of the revalued stock options. Using our previous example, let's say the new strike price is now $10. Calculate the new intrinsic value by subtracting the new strike price from the current stock price. Multiply that answer by the number of shares granted to find the revalued stock option figure. The equation would look like this ($15 - $10) = $5 x 100 shares = $500.
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Enter these calculations into a spreadsheet. Enter the current stock price into a separate cell in the spreadsheet. Use this cell in the calculation in Step 3.
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Update the current price in the designated cell to update the value of the revalued stock options at any point in the future before the options expire.
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Tips & Warnings
The Financial Accounting Standards Board implemented Statement No. 123(R) in 2004, according to the Illinois CPA Society. This statement requires public companies to use the fair-value method to record stock option expenses on their financial statements. The most popular calculations uses the Black-Scholes option-pricing model.
Employees should understand that many companies will implement some vesting requirements with any granted stock options. This allows the business to retain their employees for a longer period of time. Also, employees should contact their tax advisers regarding any tax implications of the stock options.
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