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Market Jlalue Leverage Ratios ~\ thir/d family of leverage ratios relates a company's liabilities to the mnr-,<et Vll lie o• its eqwty or the , .,, / , r · 'J mm "et vn lie O; its assets. For Ametek in 200 l Market value of debt M ' M k 1 = arkct value of debt ar et va ue of equitv N b • • 1 um er of shares of stock x I)r· h ice per s ,ire $694.2 = $1,046.5 = 66.3% Market value of debt i\11:irket I = ,Vlarket value of debt va uc of assets Market v·1lue of debt + . · equity _ $69-+.2 . -£69-U + $ 1,u46.5 = 39.9% ~ Chapter 2 Evaluating Finanrial Perfonnanrr 45 Careful readers will note that I have assumed the market value of debt equals the book value of debt in both of these ratios. Strictly speaking, this is seldom true, but in most instances the difference between the two quan-tities is small. Also, accurately estimating the market value of debt often turns out to be a tedious, time-consuming chore that is best avoided-unless, of course, you are being paid by the hour. Market value ratios are clearly superior to book value ratios simply be-cause book values are historical, often irrelevant numbers, while market values indicate the true worth of creditors' and owners' stakes in the busi-ness. Recalling that market values are based on investors' expectations about future cash flows, market value leverage ratios can be thought of as coverage ratios extended over many future periods. Instead of comparing income to financial burden in a single year as coverage ratios do, market value ratios compare today's value of expected future income to today's value of future financial burdens. Market value ratios are especially helpful when assessing the financial leverage of rapidly growing, start-up businesses. Even when such compa-nies have terrible or nonexistent coverage ratios, lenders may still extend them liberal credit if they believe future cash flows will be sufficient to ser-vice the debt. McCaw Communications offers an extreme example of this. At year-end 1990, McCaw had over $5 billion in debt; a debt-to-equity ratio, in book terms, of 330 percent; and annualized interest expenses of more than 60 percent of net revenues. Moreover, despite explosive growth, McCaw had never made a meaningful operating profit in its principal cel-lular telephone business. Why then did otherwise intelligent creditors loan McCaw $5 billion? Because creditors and equity investors believed it was only a matter of time before the company would begin to generate huge cash flows. This optimism was handsomely rewarded in late 1993 when AT&T paid $12.6 billion to acquire McCaw. Including the $5 bil-lion in debt assumed by AT&T, the acquisition ranked as the second largest in corporate history at the time. A more recent example is Amazon.com. In 1998 the company recorded its largest-ever loss of $124 million, had never earned a profit, and had only $139 million left in shareholders' equity. But not to worry: Lenders were still pleased to extend the company $350 million in long-term debt.