valueofthecashandmarketablesecuritiestoittoarriveat
firm value.
CanthisbedonewiththeFCFEvaluationmodelsdescribed
in theearlierchapters? While net income includesincome
from financial assets, we can still separate cash and
marketablesecuritiesfromoperatingassets,ifwewantedto.
To dothis, wewouldfirst backout theportionofthenet
incomethatrepresentstheincomefromfinancialinvestments
(interestonbonds,dividendsonstock)andusethenon-cash
netincometoestimatefreecashflowstoequity.Thesefree
cashflowstoequitywouldbediscountedbackusingacostof
equitythatwouldbeestimatedusingabetathatreflectedonly
theoperatingassets.Oncetheequityintheoperatingassets
has been valued, you could add the value of cash and
marketable securities to it to estimate the total value of equity.
Ifcashiskeptseparatefromotherassets,thereisone final
adjustment that has to be factored into the valuation. To
estimatesustainableorfundamentalgrowth,welinkgrowth
innetincometoreturns onequityandgrowthinoperating
income to return on capital.
18 Thesereturnsshouldbecomputedusingonlythenoncash
earnings and capital invested in operating assets:
Theseare also thereturns weshould be comparing to the
costs ofequity and capitalto make judgmentson whether
firms are generating excess returns on their investments.