19 Inthenetdebtratioapproach,weareassumingthatanytax
benefitsfromdebt(usedtofundcash)areexactlyoffsetby
thetaxcostsassociatedwithreceivinginterestincomeonthe
cash.
20 When net debt ratios become negative, analysts should
continuetousethenegativevalues,eventhoughitmaygive
rise to some discomfort. In effect, this willmean that the
leveredbetawillbelowerthantheunleveredbetaandthatthe
debtratiointhecostofcapitalcalculationwillbeanegative
number.
21 Thereisathirdscenario.Wheninterestincomefromcash
(which is riskless) is discounted back at a risk-adjusted
discountrate(seeIllustration10.1),cashwillbediscountedin
value, but for the wrong reasons.
22 While this assumptionisstraightforward with cash,it is
less so with real assets, where the liquidation value may
reflectthepoorearningpoweroftheasset.Thus,thepotential
surplus from liquidation may not be as easily claimed.
23 Firmswithlargecashbalancesareattractivetargets,since
thecashcanbeusedtooffsetsomeofthecostofmakingthe
acquisition.
24 Thisstatementistrueonlyifthefirmearnsexcessreturns
onitsinvestments. Growthwithzeroexcessreturns hasno
effect on value or the price-earnings ratio.
25 L. Pinkowitz and R. Williamson, “What Is A Dollar
Worth? The Market Value of Cross Holdings,” working
paper, Georgetown University, 2002.