You have been asked to review another analyst’s valuation of System Logic Inc., a technology firm. The analyst estimated a value per share of

\($11\) while the stock was trading at \($12.50\) per share. In making this estimate, however, the analyst divided the value of equity by the fully diluted 1.4 million shares outstanding. Reviewing this number, you discover that the firm has only 1 million shares outstanding and that the remaining 400,000 shares represent options with an average maturity of three years and an average exercise price of \($5.

a.\) Estimate the correct value per share, using the treasury stock approach.

b. If the standard deviation in the stock price is 80%, estimate the value of the options using an option pricing model (and the current stock price) and the correct value per share.

c. Will your value per share increase or decrease if you reestimate the value of the options using your estimated value per share?