definingtheoptimalfinancingmixistodefineitasthemixat
which the cost of capital is minimized.
4.Match financingto assets. Thefundamentalprinciplein
designingthefinancingofa firmistoensure thatthecash
flowsonthedebtmatchascloselyaspossiblethecashflows
ontheasset.Firmsthatmismatchcashflowsondebtandcash
flowsonassets(byusingshort-termdebttofinancelong-term
assets,debtinone currencytofinanceassetsin adifferent
currency,orfloating-ratedebttofinance assetswhosecash
flowstendtobeadverselyimpactedbyhigherinflation)will
endupwithhigherdefaultrisk,highercostsofcapital,and
lowerfirmvalues.Totheextentthatfirmscanusederivatives
and swaps to reducethese mismatches,firm value canbe
increased.
Manage Nonoperating Assets
In the first four components of value creation, we have
focusedonwaysinwhichafirmcanincreaseitsvaluefrom
operatingassets.Asignificantchunkofafirm’svaluecanbe
derived from itsnonoperating assets—cash and marketable
securities, holdings in other companies, and pension fund
assets(and obligations).To theextentthat theseassetsare
sometimes mismanaged, there is potential for value
enhancement here.
Cash and Marketable Securities
In conventional valuation, we assume that the cash and
marketablesecuritiesthatareheldbyafirmareaddedtothe
valueofoperatingassetsto arriveatthevalueofthefirm.
Implicitly,weassumethatcashandmarketablesecuritiesare