As a consequence, the cost of capital that is used should
reflectonlytheoperatingriskofthecompany.Italsofollows
that the present value of the cash flows obtained by
discountingthecashflowsatthecostofcapitalwillmeasure
the value of only the operating assets of thefirm (which
contribute to the operating income). Any assets whose
earnings are not part of operating income have not been
valued yet.
From Operating Asset Value to Equity Value
To get from thevalue of operating assets to the value of
equity,wehavetofirstincorporatethevalueofnonoperating
assets that are owned by the firm and then consider all
nonequity claims that may be outstanding against the firm.
- Incorporate nonoperating assets. Nonoperating assets
includeallassetswhoseearningsarenotcountedaspartof
theoperatingincome.Themostcommonofthenonoperating
assets is cash and marketable securities, which can often
amount to billions atlarge corporations, and thevalue of
theseassets shouldbe addedto thevalue oftheoperating
assets. In addition, the operating income from minority
holdingsinothercompaniesisnotincludedintheoperating
incomeandFCFF;wethereforeneedtovaluetheseholdings
andaddthemtothevalueoftheoperatingassets.Finally,the
firmmayownidleandunutilizedassetsthatdonotgenerate
earningsorcashflows.Theseassetscanstillhavevalueand
should be added on to the value of the operating assets.
2.Considernonequityclaimsagainstthecompany.Themost
commonof theseclaimsis obviouslyinterest-bearing debt,
which shouldbe netted out against firmvalueto arrive at