flow measures, and they have two choices with
equitymultiples.Oneisanapproximatemeasureof
cash earnings,obtainedby addingdepreciationand
othernoncashchargesbacktonetincome.Theother
isthemeasureoffreecashflowtoequityintroduced
inChapter3,wherewenettedoutreinvestmentneeds
anddebtcashflowstogettoafinalmeasureofcash
flow. Aswith earnings numbers,the definitions of
cashflowshouldbeconsistentwiththemeasureof
equityvalueused.Iftheequityvalueistheaggregate
market value of equity, we should use total net
incometoestimatefreecashflowstoequity.Ifthe
equityvalueisnetofcash, thecashflowto equity
should also net out interest income from cash.
- Equity book value measures. The other logical
measuretoscalethemarketvalueofequitytoisthe
book value of equity. Here again, the measure of
bookequitythatweuseshouldbeconsistentwiththe
measureofmarketequity.Table8.2summarizesthe
choices.
Notethatshareholders’equity(bookvalueofequity)
includesretainedearningsandany otheraccounting
adjustmentsmadetobookequity.Onebigissuethat
facesanalystswithbookequity iswhatto dowith
goodwillarisingfromacquisitions.Thereasonisthat
theaccountingforgoodwillcan makecomparisons
between acquisitive and nonacquisitive firms
difficult.Toseewhy,notethatcompaniesthatgrow
through internal investments are not required to
recordthevalueofgrowthpotentialaspartoftheir
assets or in shareholders’ equity. A company that
growsthroughacquisitionshastorecordthemarket
