willreportahighercashbalancebutitwillalsoreportmore
debt outstanding.
Thefinalcaveatthatweshouldaddrelatestodivestituresof
portionsofexistingbusiness,especiallytowardtheendofa
fiscal year, when computing enterprise value-to-operating
incomeorcash flowmultiples.Thedivestiturewillreplace
operatingassetswithalargecashbalance(theproceedsofthe
divestiture)buttheoperatingincomeorEBITDA fromlast
year will include the earnings from the assets that were
divested.Togetamorerealisticestimate,wehavetoeither
removetheportionoftheEBITDAthatisattributabletothe
divested assets or use a projected number that does not
include earnings from these assets.
How Does the Market Value Cash?
Inthelastsection,weconsideredhowbesttovaluecashin
both a discounted cash flow and in a relative valuation.
Ultimately, though, the discussion cannot be complete
withoutexamininghowthemarketvaluescash.Afterall,if
the market systematically misestimates the value of cash,
therewillbenopayofftotheanalystwhovaluesitcorrectly.
PinkowitzandWilliamson(2002)triedtoestimatethevalue
thatmarketswereattachingtocashbyregressingthemarket
values of firms against fundamental variables that should
determine value(including growth, leverage,and risk)and
adding cash as an independent variable.
25 Theyconcludedthatthemarketvaluesadollarincashat
aboutfacevalue,withasubstantialstandarderror.Consistent
withthemotivationsforholdingcash,theyfoundthatcashis
valuedmorehighlyinthehandsofhigh-growthcompanies
withmoreuncertaintyaboutfutureinvestmentneedsthanin