Why Options Affect Value per Share.Why do existing options affect value per share?
Note that not all options do. In fact, options issued and listed by the options exchanges have no effect on the value per share of the firms on which they are issued. The options issued by firms do have an effect on value per share, since there is a chance that they will be exercised in the near or far future. Given that these options offer the right to individuals to buy stock at a fixed price, they will be exercised only if the stock price rises above that exercise price. When they are exercised, the firm has two choices, both of which have negative consequences for existing stockholders. The firm can issue additional shares to cover the option exercise. But this increases the number of shares outstanding and reduces the value per share to existing stockholders. 2 Alternatively, the firm can use cash flows from operations to buy back shares in the open market and use these shares to meet the option exercise. This approach reduces the cash flows available to current equity investors i
