three decisions that we have to make that can have
consequences for how we measure equity value:
1.Per-shareoraggregateequityvalue.Themarketvalueof
equity can be computed on a per-share basis or as an
aggregate value (the market capitalization or market cap).
Sincethelatteris computedby multiplyingthenumber of
sharesoutstandingbytheshareprice,theeffectsofusingone
overtheotheronequitymultiplesmayseeminconsequential,
but thereareconditions underwhich thetwowill diverge.
Oneiswhentherearemultipleclassesofsharesinthesame
company, trading at different stock prices. The market
capitalizationwillincludethemarketvaluesofalloutstanding
shares,whereasthemarketpricewillreflectonlytheclassof
sharesconsidered.Theotheris whenthereisa divergence
between the number of shares outstanding today (primary
shares)andthepotentialnumberthatcanbeoutstandingif
managementoptions,convertibles,andwarrantsareexercised
(diluted shares). The market capitalization is usually
computed usingtheformer,buttheearningsper shareand
book value per share are often computed using the latter.
2.Cum-cash orex-cash.Themarket value ofequity fora
publiclytradedfirmwillincorporatethecompany’sholdings
of cash and marketable securities. Thus, the market
capitalizationof$300billionforMicrosoftinNovember 2005
includesthe$40billion incash heldbythecompany.The
interestincomeearnedbythecompanyonitscashholdingsis
reportedaspartoftheoverallnetincomeofthatcompany.In
conventionalpractice,analystsusethetotalmarketvalueof
equityand thetotalnetincomeor bookvalueofequityto
compute equity multiples. Although this is internally
consistent,theriskandreturncharacteristicsofcashholdings