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

(Hop HipldF0AV) #1
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

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