- Equity earnings variables. In a conventional
accounting statement,we begin with revenues, net
outoperatingexpensestoarriveatoperatingincome,
andsubtractfinancialexpensesandtaxestoestimate
netincome.Whencomputing equitymultiples,itis
clearlyinappropriatetouseoperatingincomeasour
measureofearningsbecauseitaccruesto allclaim
holders in the firm.With net income, though, the
measurethat wechooseto usehas tomatch upto
howwecompute marketvalueofequity.Table 8.1
summarizes the consistent choices, given different
measures of equity value.
1
TABLE 8.1Equity Earnings Measures and Equity Market
Value
Measure of Equity Value
Measure of Equity
Earnings
Price per share Earnings per share
Aggregate market value of equity
Net income after
option expensing
Netmarketequity=Marketvalueof
equity − Cash
Net income −
After-tax interest
income from cash
Option augmentedequity =Market
value of equity + Value of
management options
Net income before
option expensing
Witheachofthesemeasures,thereareotherjudgmentsthat
willhavetobemade.Forinstance,allofthesemeasuresof
equity earnings can be computed before and after