for a narrow definitionof debtwhere weconsidered only
interestbearingdebtandleasecommitments.Ingoingfrom
firmvaluetoequityvalue,wepositedthatweshouldinclude
other potentialliabilities such as underfundedpension and
health care obligations. In both cases, we argued that the
market value of debt wasthe more legitimate measure of
debt.Whencomputingenterprise value,we willhewmore
closelytotheseconddefinitionthanthefirstoneandargue
for inclusionof otherpotential liabilitiesin debt. Wealso
believe that, notwithstanding conventional practice, using
marketvalueofdebt(evenwhenitisestimated)isabetter
practice than using book value of debt.
ILLUSTRATION 9.1: Estimates of Firm and Enterprise
Value
In this illustration, we estimate firm and enterprise value
measuresforSegovia,afirmwithtwoholdings—a60%stake
inSevilleTelevisionanda10%stakeofLatinWorks,arecord
and CD company. The first holding is categorized as a
majority,activeholding(resultinginfullconsolidation)and
thesecondasaminorityholding.Here,wewilltrytoestimate
measures of firm value for Seville using the following
information.
- The market value of equity at Segovia is $1,500
million,theconsolidateddebtoutstandingatthefirm
is$500million,andtheconsolidatedcashbalanceis
$150million.Aportionofthedebtoutstanding($150
million) and the cash balance ($50 million) is
attributable to Seville Television. The minority
interestinSevilleisshowninSegovia’sbalancesheet
at $120 million.