when using the dividend discount model it gives us immediately the price per share.Why don't we take options into account given that option holders might have a claim on future dividends?

Question

anonymous · Answer

Are you discounting dividends per share or aggregate dividends?  If aggregate dividends, then your model gives you the aggregate market cap of the firm, which will be shared among all equity holders including option holders.  You can use other methods to calculate the value of any options and warrants and subtract this from total market cap to get the value of shares outstanding.  If you are discounting dividends per share, then your dividend growth rate should take into account, implicitly or explicitly, the issuance of additional shares underlying options and warrants, and their dilutive impact on dividends per share.  If the dividend growth rate you are using is based on historical trends or averages, then it probably includes some dilution from options that are exercised each year.