A DCF gives a software company an enterprise value but you do not know its share price, and it has options and RSUs outstanding. Solve for the value per share with the treasury stock method, and explain how stock-based compensation must be treated consistently.

Value per share is about Rs 47.83. Write price and dilution together: P times 115 crore shares, less Rs 300 crore of option strike cash, equals Rs 5,200 crore, so P is 5,500 over 115. Diluted shares are then 108.73 crore. Stock compensation must be counted once: either as a cost in the cash flows, as here, or as future dilution in the share count, never added back and ignored.

Because the answer moves the input. The treasury stock methodAssume in-the-money options are exercised and the strike cash is used to buy back shares at the current price, so only the net new shares count as dilution. needs a price to decide how many shares the strike cash buys back, and the price is what you are solving for. Guess Rs 52, the basic-share answer, and you get 109.23 crore diluted shares and a new price of Rs 47.61. Use that and you get Rs 47.84, then Rs 47.83. It converges, but slowly and only if you keep going. It is like setting a restaurant bill split that depends on how many friends come, while who comes depends on the split.

Write the price into the dilution and solve both together. Diluted shares are 100 + 5 + 10 - 300/P. Equity value equals price times diluted shares, so 5,200 = 115P - 300. That gives P = 5,500 / 115 = Rs 47.83: equivalently, add the strike cash option holders would pay to equity value and divide by every share that could exist. Check it: at Rs 47.83 the options are in the money, the Rs 300 crore buys back 6.27 crore shares, leaving 108.73 crore diluted shares, and 5,200 divided by that is Rs 47.83. If the solved price came out below the Rs 30 strike, you would drop the options and solve again.

Because it is one cost, and it can be paid in only one way. If the DCF treats Rs 40 crore a year of SBCStock-based compensation: paying staff in shares or options instead of cash. It costs existing shareholders through dilution rather than through the bank account. as a cost, the share count should hold only shares and options that exist today; future grants are already paid for in the cash flows. If you add it back as non-cash, you must then add the shares future grants will create, or you have counted employees' pay as free. The colleague's version does neither: Rs 5,600 crore over today's share count gives Rs 53.04, 10.9% too high, and the gap is exactly the value of the pay nobody charged for.

Close with the practical answer an interviewer wants. Treat SBC as a cash cost in unlevered free cash flow and use today's diluted share count; it is the cleaner choice because forecasting future grants and prices adds a second circular problem. The limit: unvested RSUs and options can lapse when staff leave, so a careful model applies a forfeiture estimate rather than counting every one, and performance-linked awards count only if the targets are likely to be met.