The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, share tips neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.
Stock valuation based on earnings starts out with one giant logical leap: you assume that each dollar of earnings per share of a company is really worth one actual dollar of income to you as a stockholder. This is theoretically because you expect the company to use that dollar in a beneficial way: for example, they could use it to pay you a dividend; or they could invest it in their own growth, which would cause future earnings to be even greater.
A few key concepts help define how stock options work:
- Exercise: The purchase of stock pursuant to an option.
- Exercise price: The price at which the stock can be purchased. This is also called the strike price or grant price. In most plans, the exercise price is the fair market value of the stock at the time the grant is made.
- Spread: The difference between the exercise price and the market value of the stock at the time of exercise.
- Option term: The length of time the employee can hold the option before it expires.
- Vesting: The requirement that must be met in order to have the right to exercise the option-usually continuation of service for a specific period of time or the meeting of a performance goal.
Sometimes there are no recent sales that can be used to establish the value of stock tips. Then you have to estimate the value of the entire company and divide by the number of shares outstanding to find the value per share.
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