areso different from the riskand returncharacteristics of
operatingassetsthatitmaymakesense(especiallywhencash
balances comprisea large proportionofthe firmvalue)to
computethemarketvalueofequitynetofcashholdings.This
netmarketvalueofequitycanbeconsideredtobethemarket
value of equity in noncash or operating assets.
- Equity options. One reason for the disconnect between
per-shareand aggregatevaluesofequityistheexistenceof
managementoptions.Managementoptions,inparticular,and
company-issued equity options (including warrants and
convertiblebonds),ingeneral,createasecondclaimonthe
equityinacompany(inadditiontotheprimaryclaimfrom
commonstockholders).Thetotalmarketvalueofequityina
company with substantial management and other equity
optionsoutstandingisthereforethemarketcapitalizationplus
theestimatedorobservedmarketvalueofequityoptions.In
otherwords,Microsoft’smarketcapitalizationof$300billion
reflectsthevalueofjustthecommonstockinthecompany;
theestimatedvalueofmanagementoptionsoutstandingatthe
companyshouldbeaddedtothemarketcapitalizationtoget
tototalmarketvalueofequity.Needlesstosay,mostanalysts
do not make this adjustment; we will consider the
implications in the next section.
Scaling Variable
Aswenotedin Chapter7,consistencyrequiresusto scale
equity values to equity variables. Equity multiplescan be
stated in terms of earnings, cash flow, book value, and
revenues: