Infact,thisprocesscanbeusedtoconvertanysetoffinancial
commitments into debt.
Whatwouldwenotcountindebt?Accountspayable,supplier
credit, and other non-interest-bearing liabilities are best
treatedaspartofnoncashworkingcapitalandwillaffectcash
flows.Unfundedpensionplanandhealthcareobligationsas
wellaspotentiallitigationliabilitiesundoubtedlyactasadrag
onequityvaluebutitisbestnottoconsiderthemasdebtfor
cost of capital calculations. We consider them later as
potentialdebtwhenwegofromthevalueofoperatingassets
to equity value.
Estimating Market Value Weights
Inaworldwhereallfundingwasraisedinfinancialmarkets
andsecuritieswerecontinuouslytraded,themarketvaluesof
debtandequityshouldbeeasytoget.Inpractice,thereare
somefinancingcomponentswithnomarketvaluesavailable,
evenforlargepubliclytradedfirms,andnoneofthefinancing
components are traded in private firms.
Market Value of Equity
Themarketvalueofequityisgenerallythenumberofshares
outstandingtimesthecurrentstockprice.Sinceitmeasures
thecostofraisingfundstoday,itisnotgoodpracticetouse
average stock prices over time or some other normalized
version of the price.
- Multipleclassesofshares.Ifthereismorethanone
classofsharesoutstanding,themarketvaluesofall
ofthesesecuritiesshouldbeaggregatedandtreated