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

• Equity earnings variables. In a conventional
  accounting statement,we begin with revenues, net
  outoperatingexpensestoarriveatoperatingincome,
  andsubtractfinancialexpensesandtaxestoestimate
  netincome.Whencomputing equitymultiples,itis
  clearlyinappropriatetouseoperatingincomeasour
  measureofearningsbecauseitaccruesto allclaim
  holders in the firm.With net income, though, the
  measurethat wechooseto usehas tomatch upto
  howwecompute marketvalueofequity.Table 8.1
  summarizes the consistent choices, given different
  measures of equity value.
  1

TABLE 8.1Equity Earnings Measures and Equity Market
Value

Measure of Equity Value

Measure of Equity

Earnings

Price per share Earnings per share

Aggregate market value of equity

Net income after

option expensing

Netmarketequity=Marketvalueof

equity − Cash

Net income −

After-tax interest

income from cash

Option augmentedequity =Market

value of equity + Value of

management options

Net income before

option expensing

Witheachofthesemeasures,thereareotherjudgmentsthat
willhavetobemade.Forinstance,allofthesemeasuresof
equity earnings can be computed before and after