Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

(Hop HipldF0AV) #1

Infact,thisprocesscanbeusedtoconvertanysetoffinancial
commitments into debt.


Whatwouldwenotcountindebt?Accountspayable,supplier
credit, and other non-interest-bearing liabilities are best
treatedaspartofnoncashworkingcapitalandwillaffectcash
flows.Unfundedpensionplanandhealthcareobligationsas
wellaspotentiallitigationliabilitiesundoubtedlyactasadrag
onequityvaluebutitisbestnottoconsiderthemasdebtfor
cost of capital calculations. We consider them later as
potentialdebtwhenwegofromthevalueofoperatingassets
to equity value.


Estimating Market Value Weights


Inaworldwhereallfundingwasraisedinfinancialmarkets
andsecuritieswerecontinuouslytraded,themarketvaluesof
debtandequityshouldbeeasytoget.Inpractice,thereare
somefinancingcomponentswithnomarketvaluesavailable,
evenforlargepubliclytradedfirms,andnoneofthefinancing
components are traded in private firms.


Market Value of Equity


Themarketvalueofequityisgenerallythenumberofshares
outstandingtimesthecurrentstockprice.Sinceitmeasures
thecostofraisingfundstoday,itisnotgoodpracticetouse
average stock prices over time or some other normalized
version of the price.



  • Multipleclassesofshares.Ifthereismorethanone
    classofsharesoutstanding,themarketvaluesofall
    ofthesesecuritiesshouldbeaggregatedandtreated

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