asequity.Evenifsomeoftheclassesofsharesare
not traded,market valueshaveto be estimated for
nontradedsharesandaddedtotheaggregateequity
value.- Equityoptions.Ifthereareotherequityclaimsinthe
firm—warrants and conversion options in other
securities—theseshouldalsobevaluedandaddedto
thevalueoftheequityinthefirm.Inthepastdecade,
theuseofoptionsasmanagementcompensationhas
created complications, since the value of these
options has to be estimated.
How do we estimate the value of equity for private
businesses? We have two choices. One is to estimate the
marketvalueofequitybylookingatthemultiplesofrevenues
and net income at which publicly traded firms trade. The
otheristobypasstheestimationprocessandusethemarket
debtratioofpubliclytradedfirmsasthedebtratioforprivate
firmsinthesamebusiness.Thisistheassumptionwemade
for Kristin Kandy, where we used the industry average
debt-to-equityratio forthefoodprocessing businessasthe
debt-to-equity ratio for Kristin Kandy.
Market Value of Debt
Themarketvalueofdebtisusuallymoredifficulttoobtain
directlysinceveryfewfirmshavealloftheirdebtintheform
ofbondsoutstandingtradinginthemarket.Manyfirmshave
nontradeddebt,suchasbankdebt,whichisspecifiedinbook
valuetermsbutnot marketvalueterms.To getaround the
problem,analystsmakethesimplifyingassumptionthatthe
bookvalueofdebtisequaltoitsmarketvalue.Whilethisis
not a bad assumptionfor mature companies in developed