Question

I had currently a training at an investment bank on Financial Modeling and I noticed that their definition of treasury stock approach is different than the one you use in Damodaran's textbooks to value management options. They assume that cash proceeds will be used to buy back stocks while in the textbook the equation is (Value of equity +cash proceeds from exercising options)/(primary number of shares+number of options exercised) . Their equation is (Value of equity/(primary number of shares+ shares issued after exercising options and repurchasing shares). The two approaches lead to a differe

Answer 1

The two appraoches lead to different results so which one is advisable?

Answer 2

best approach is the proceeds which company receive uses to buy shares from the market at current market price but proceeds are less than the market value which lead to issue new shares which is add in the outstanding shares and dilutes.
for example

5 million options are in-the-money as the exercise
price of $18.00 is lower than the current share price of $20.00. This means that
the holders of the options have the right to buy the company’s shares at $18.00
and sell them at $20.00, thereby realizing the $2.00 differential. Under the TSM, it
is assumed that the $18.00 of potential proceeds received by the company is used
to repurchase shares that are currently trading at $20.00. Therefore, the number of
shares repurchased is 90% ($18.00 / $20.00) of the options, or 4.5 million shares
in total (90% × 5 million). To calculate net new shares, the 4.5 million shares
repurchased are subtracted from options of 5 million, resulting in 0.5 million. These
new shares are added to the company’s basic shares outstanding to derive fully
diluted shares of 100.5 million.