Summary: Barbara Arneson must decide which job offer to take. With all other factors being equal, she is now down to a d
Posted: Thu May 26, 2022 6:56 am
Summary: Barbara Arneson must decide which job offer to take.
With all other factors being equal, she is now down to a decision
based on the value of the equity compensation offered by each
company (i.e., the stock options). One company is a public company
with easily gathered data on its financial status. The other
company is a start-up which has only financial projections. This
session is a great chance to learn about the four essentials of
stock options: the length of the vesting period, the strike or
exercise price, estimating the market price at some future point,
and the number of shares currently outstanding at the enterprise.
To prepare for this assignment (see #3 below for submission
assignment):
Review these basic formulas and information regarding venture
finance: Earnings per Share (EPS) = Earnings / Number of Shares
Outstanding Share Price = Earnings per Share * PE Ratio Market
Capitalization = Share price * Number of Shares Outstanding
1. The current number of shares outstanding for BioGene is 23
million and its current PE ratio is 49. Assuming a yearly growth in
earnings of 50 percent for the next four years and a decline in PE
ratio to 25, this implies a valuation of $962 million in 2022.
Assume InterWeb's earnings (after-tax profits) in 2022 are $6.3
million as stated in their business plan. Assigning a PE ratio of
50 of InterWeb in 2022, what will their valuation be?
2. What is Barbara’s percentage ownership in each firm assuming
nothing else changes in shares outstanding for either of them in
the next four years when the options vest? Recall from the case
that BioGene has 23 million outstanding shares, and InterWeb has
23.7 million outstanding shares.
3. Using the valuation estimates in Question 1 for 2022, compare
the offers in four years when the stock options will be fully
vested. Assuming Barbara remains employed until that time and can
sell her options in a cashless transaction on the same day, which
stock option offer yields a larger gain? Make sure to include the
cost of the stock options and state all critical assumptions. In
addition to compensation matters, what other factors would you
suggest Barbara consider in making her decision?
With all other factors being equal, she is now down to a decision
based on the value of the equity compensation offered by each
company (i.e., the stock options). One company is a public company
with easily gathered data on its financial status. The other
company is a start-up which has only financial projections. This
session is a great chance to learn about the four essentials of
stock options: the length of the vesting period, the strike or
exercise price, estimating the market price at some future point,
and the number of shares currently outstanding at the enterprise.
To prepare for this assignment (see #3 below for submission
assignment):
Review these basic formulas and information regarding venture
finance: Earnings per Share (EPS) = Earnings / Number of Shares
Outstanding Share Price = Earnings per Share * PE Ratio Market
Capitalization = Share price * Number of Shares Outstanding
1. The current number of shares outstanding for BioGene is 23
million and its current PE ratio is 49. Assuming a yearly growth in
earnings of 50 percent for the next four years and a decline in PE
ratio to 25, this implies a valuation of $962 million in 2022.
Assume InterWeb's earnings (after-tax profits) in 2022 are $6.3
million as stated in their business plan. Assigning a PE ratio of
50 of InterWeb in 2022, what will their valuation be?
2. What is Barbara’s percentage ownership in each firm assuming
nothing else changes in shares outstanding for either of them in
the next four years when the options vest? Recall from the case
that BioGene has 23 million outstanding shares, and InterWeb has
23.7 million outstanding shares.
3. Using the valuation estimates in Question 1 for 2022, compare
the offers in four years when the stock options will be fully
vested. Assuming Barbara remains employed until that time and can
sell her options in a cashless transaction on the same day, which
stock option offer yields a larger gain? Make sure to include the
cost of the stock options and state all critical assumptions. In
addition to compensation matters, what other factors would you
suggest Barbara consider in making her decision?