equityvalue.AswearguedinChapter3,wewouldtreatlease
commitments as the equivalent of debtfor cost of capital
calculations and for deriving equity value. Three more
adjustmentsmayneedtobemadetoarriveatequityvalue.
Thefirstrelatestomajoritystakesinsubsidiaries,generally
definedtobeholdingsof 50 percentorhigher,whichrequire
fullconsolidationofthesubsidiaries’assetsandearningsin
theparentcompany.Iftheconsolidatedoperatingincomeand
cashflowisusedtovaluetheparentfirm,theestimatedvalue
oftheminorityinterestsinthesubsidiaryhastobesubtracted
toarriveatthevalueoftheparentcompany.Wewillreturnto
examinethe valuationof cash and crossholdings in more
detailin Chapter 10. Thesecond relates to other potential
claimsagainstthefirmincludingunfundedpensionplansand
healthcareobligations.Whiletheydonotmeetthedebttest
forcostofcapitalcalculations,theyshouldbesubtractedto
arriveatequityvalue.Finally,ifthefirmisfacinglawsuits
that may result in large payouts, we would compute the
expectedliability from theselawsuits andsubtract themto
estimate equity value.
In summary,the computationsto get from operating asset
value to equity value are presented inTable 6.1.
TABLE 6.1From Operating Asset Value to Equity Value
Step Output
Discount thefreecashflow to
thefirmatthecostofcapitalto
get...Valueofoperatingassetsof
the firm