“Walk me through how stock-based compensation (SBC) affects the income statement, the cash flow statement, and dilution in equity value — and explain why it matters when valuing a company.”
Walk me through how stock-based compensation (SBC) affects the income statement, the cash flow statement, and dilution in equity value — and explain why it matters when valuing a company.
Task: calculate the income statement and cash flow impact of stock-based compensation, then quantify how it dilutes per-share value.
You are given the following figures for a company's most recent fiscal year.
| Line Item | Value |
|---|---|
| Revenue | $500.0m |
| COGS | $200.0m |
| Cash SG&A | $130.0m |
| Stock-Based Compensation (SBC) | $20.0m |
| Depreciation & Amortization (D&A) | $30.0m |
| Tax Rate | 25% (0.25) |
| Diluted Shares Outstanding (start of year) | 100.0m |
| Current Share Price | $50.00 |
SBC is a real expense on the income statement, even though no cash leaves the company.
EBIT = Revenue - COGS - Cash SG&A - SBC - D&A
Net Income = EBIT × (1 - Tax Rate)
Using this formula, compute EBIT and Net Income for the year.
Because SBC doesn't use cash, think about how it should be treated in the cash flow from operations (CFO) section.
CFO = Net Income + D&A + SBC (ignoring working capital changes)
Using this formula, compute Cash Flow from Operations.
New Shares Issued = SBC Value / Current Share Price
Diluted EPS = Net Income / (Beginning Shares + New Shares Issued)
Assume:
Using these inputs, compute the number of new shares issued and the resulting Diluted EPS, and compare it to undiluted EPS.
Try answering out loud first — then reveal the model answer and compare.
No comments yet — be the first to ask a question.