Implicitly, we are assuming that a potential buyer, in the
event of liquidation, will pay this value.
Wecanusethefourthapproachforfirmsthathaveseparable
assets that are individually traded. Here we cumulate the
marketvaluesofindividualassetstoarriveatfirmvalue.For
example,wecanvalueatroubledrealestatefirmthatowns
fivepropertiesbyvaluingeachpropertyseparatelyandthen
aggregating the values.
Variance in Firm Value
We canobtain the variancein firmvalue directly if both
stocksandbondsinthefirmaretraded.Definingσe 2 asthe
varianceinthestockpriceandσd 2 asthevarianceinthebond
price,weasthemarket-valueweightofequity,andwdasthe
market-value weightof debt,wecan writethevariancein
firm value as:
26
whereρedisthecorrelationbetweenthestockpriceandthe
bondprice.Whenthebondsofthefirmarenottraded,wecan
usethevarianceofsimilarlyratedbondsastheestimateof
σd 2 andthecorrelationbetweensimilarlyratedbondsandthe
firm’s stock as the estimate of ρed.
Whencompaniesgetintofinancialtrouble,thisapproachcan
yieldmisleadingresultsasbothitsstockpricesanditsbond
pricesbecomemorevolatile.Analternativethatoftenyields
morereliableestimatesistousetheaveragevarianceinfirm
valueforotherfirmsinthesector.Thus,thevalueofequityin