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The Financial Accounting Standards Board (FASB) released a Proposed Statement of Financial Accounting Standards (FAS) in 2004 that amended earlier FAS Statements 123 and 95. Soon after, the Wall Street Journal called this release "among the most far- reaching steps that the Financial Accounting Standards Board has made in its thirty-year history. " As a result, companies must learn how to rigorously and efficiently value and expense employee stock options (ESOs). Based on author Johnathan Mun’s advisory work with the FASB over 2003 and 2004, his graduate research work in the area of options analysis, and actual FAS 123 consulting projects with several Fortune 500 firms, Valuing Employee Stock Options provides you with a comprehensive understanding of the valuation applications of a customized binomial lattice through a systematic and objective assessment of the methodology.

This just-in-time resource includes informative sections that:

  • Review the impact of ESO Cost

  • Illustrate the issues of fair market valuation through an analytical assessment of three mainstream approaches used in option pricing.

  • Discuss the technical background required to run the Black-Scholes model (BSM) and customized binomial lattices
Run through in-depth sample case studies applying FAS 123

  • Provide multiple options valuation results that prove valuable from the perspective of both an analyst and a chief financial officer

The analyses performed in this book also use the author’s own proprietary customized binomial lattice computer algorithms as well as his Real Options Analysis Toolkit, and Risk Simulator simulation software. Filled with in-depth insight and expert advice, Valuing Employee Stock Options can help CFOs and finance directors as well as analysts, consultants, and accountants understand the implications and applications of valuing employee stock options in light of today’s ever-changing financial rules and regulations.


"Veritas has modeled the valuation of its employee stock options for analytical purposes using a proprietary customized binomial lattice developed by Dr. Johnathan Mun. The valuation based on the customized binomial lattice model allows us to take into account the impacts of multiple vesting periods, employee suboptimal exercise behavior, forfeiture rates, changing risk-free rates, and changing volatilities over the life of the option. The customized binomial lattice model resulted in a considerably lower expense, considering the expensing guidelines included in the FAS 123."

Don Rath, Vice President, Tax and Stock Administration, Veritas Software Corporation

"This is one of those rare books written in anticipation of a major shift in the industry and economy. FAS 123 will throw a lot of public companies into a frenzy, the smart ones are identifying the opportunity to master the process and take over the driver’s seat. The methodology and the tools developed by Dr. Johnathan Mun are proven, pragmatic, and offer a great deal of value and benefit to those early adopters."

Dr. Markus Junginger, Managing Partner, IBCOL Consulting

"After extensive review of the FASB exposure draft and consideration of a variety of option valuation methodologies, E*TRADE FINANCIAL has decided to implement a binomial lattice model in Equity Edge, our stock plan management and reporting software. We found Dr. Mun’s work on employee stock option pricing very valuable."

Naveen Agarwal, Director, Product Management, E*TRADE FINANCIAL Corporation