In this model, we're asked to calculate the acquisition equity value of a target.

We've got the unaffected share price of 10.

We've got a premium, and then we've got a basic shares outstanding.

But what we need to do is add in the effect of options. These options are gonna lead to new shares.

So let's start by calculating the acquisition share price.

That's going to be one plus the 30% premium times by the unaffected share price of 10, which gives us an acquisition share price of 13.

We now move on to the net new shares from options.

For this, I'm going to use my treasury stock method.

So I want the maximum of the acquisition share price minus the option strike price, all divided by the acquisition share price. Again, I want the maximum of all of that times by the options outstanding and zero.

So the net new shares from options comes to 3.1.

The value of those 13 each giving us a total of 40.

So we can see now that we've got a marginal tax rate of 30% and 100% of those options are tax deductible.

So if I take the 40 times by the 100%, I can now work out the tax deductibility times by the 30%.

So 12 can be deducted.

So my value, the options net of the tax is 28.

So my final acquisition equity value.

Now, if I take the 13 share price, multiply that by the basic shares outstanding, and then add on the options net of tax comes to 1,978.

Now let's play around with that percentage of options.

Tax deductible figure, it's currently a hundred percent, but maybe not all of the options were structured in such a way.

Maybe only 50% were structured that way.

If we keep an eye on what happens to the acquisition equity value, the 1 9 7 8, it goes up because less option tax deductibility is available to us.

That means the net cost to the company of creating those new shares and giving those gains out of options.

The net cost is higher.

That means if I want to buy the company, the net cost to me as an acquirer is also going to be higher if we reduce that tax deductibility down to zero.

Again, watch that acquisition equity value and it goes up again now to 1,990.

So where the number of options is very high and the options tax deductibility is very high as well, maybe at a hundred percent this could reduce the acquisition equity value significantly.