Measure of Equity Value Measure of Book Equity
Price per share
Book value of equity per
share
Aggregate market value of
equity
Book value of equity
(shareholders’ equity on
balance sheet)
Net market equity = Market
value of equity − Cash
Book value of equity − Cash
Option augmented equity =
Marketvalueofequity+Value
of management options
Book value of equity +
Bookvalueofmanagement
options granted (if any)?
Inthetechnologysector,companiesnowoftenholdlargeand
divergentcashbalances.Usingprice-to-salesratiosforthese
firms will bias analysts toward finding companies with
relativelysmallcashbalancestobeundervalued;oneeasyfix
forthis problemistouse equityvaluesnetted forcash. In
retailing,differentcompanieshaveadopteddifferentpractices
whenitcomestoopeningnewstores.Somecontinuetouse
operatingleases,butothershaveincreasinglychosentoinvest
inrealestatedirectlybybuyingtheirstoresiteseitherwith
equity or with debt. Using price-to-sales ratios will bias
analysts toward finding companies with more financial
leverage (either through operating leases or through real
estate debt)tobe cheaprelative tocompanies withoutthis
leverage.
DISTRIBUTIONAL CHARACTERISTICS OF EQUITY
MULTIPLES
InChapter7,wenotedthatmostmultipleshavedistributions
that are skewed toward positive values and that the