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Published on Oct 24, 2016

Today, we put the last three loose ends to rest. First, well looked at complex businesses and how to incorporate our concerns into value. The, we went back and looked at defining debt. While we used a narrow definition of debt, when computing cost of capital, we argued for using a broader definition of debt, when subtracting from firm value to get to equity value. Next, we talked about how best to deal with both currently outstanding employee options and potential options grants in the future. With the former, we argued for using an option pricing model to value the options and netting that value out of equity value, before dividing by the number of shares outstanding. With the latter, we suggested incorporating the expected cost into the operating expenses, thus lowering future earnings and cash flows. If you are still a little shaky on why stock-based compensation should not be added back as a non-cash expense, please read this post:

We then started on the discussion of numbers and narratives, i.e., the process of connecting stories to valuations and used Uber as an example. If you are interested in reading more about this process, try this blog post:

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