Chapter 10: A Sample Case Study. This chapter provides an example case study with detailed empirical justifications for the input assumptions used in the ESO valuation. | Three A Sample Case Study Applying FAS 123 h j io A Sample Case Study This chapter provides an example case study with detailed empirical justifications for the input assumptions used in the ESO valuation. These inputs were obtained based on the 2004 proposed FAS 123 revision requirements and recommendations and are used in the customized binomial lattice model. The customized binomial lattice used is a proprietary algorithm that incorporates the traditional BSM inputs stock price strike price time to maturity risk-free rate dividend and volatility plus additional inputs including time to vesting changing forfeiture rates changing suboptimal exercise behavior multiples blackout dates changing risk-free rates changing dividends and changing volatilities over This proprietary algorithm can be run to accommodate hundreds to thousands of lattice steps as well as incorporate Monte Carlo simulation of uncertain inputs whenever necessary. The following sections describe how each of the inputs was derived in the valuation analysis. The analysis is an excerpt from several real-life FAS 123 consulting projects. The numbers and assumptions have been changed to maintain client confidentiality but the results and conclusions are still equally valid. The case study here goes through in selecting and justifying each input parameter in the customized binomial lattice model and showcases some of the results generated in the analysis. Some of the more analytically intensive but equally important aspects have been omitted for the sake of brevity. STOCK PRICE AND STRIKE PRICE The first two inputs into the customized binomial lattice are the stock price and strike price. For the ESOs issued the strike price is always set at the stock price at grant date. This means obtaining the stock price will also yield the strike price. Table lists the stock prices estimated by the firm s investor relations department. Conservative and aggressive closing .
