In addition to two issues we confronted when measuring
equity value—howbest to deal with cash and with equity
options—there are two more issues that we face when
estimatingfirmvalue thatrelatetohowto dealwith cross
holdings and what to include in debt.
Cum-Cash or Ex-Cash
Theconventionalmeasureoffirmvalueisobtainedbyadding
the market value of equity to the market value of debt.
However,thisfirmvaluemeasureincludesallassetsowned
bythefirmincludingitscashholdings.Nettingcashoutfrom
firmvalueyieldsenterprisevalue,whichcanbeconsideredto
be the market value of just the operating assets of the firm.
Someanalystsdrawadistinctionbetweenoperatingcashand
excesscash,withonlyexcesscashbeingsubtractedtogetto
enterprise value. The definitions of operating cash vary
widely, though, and we would be well served drawing a
distinction between wasting and nonwasting cash, with
nonwastingcashbeingcashinvestedtoearnafairmarketrate
ofreturn.Wewouldonlynetnonwastingcashfromdebtto
gettoenterprisevalue.Wediscussthistopicinmoredetailin
Chapter 10.
Equity Options
Whendiscussingequityvalue,wenotedthatthetotalmarket
value ofequity shouldinclude thevalue of equityoptions
issuedbythefirm,includingnontradedmanagementoptions