cashvaluation

cashvaluation - 1 Dealing with Cash Cross Holdings and...

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1 Dealing with Cash, Cross Holdings and Other Non-Operating Assets: Approaches and Implications Aswath Damodaran Stern School of Business September 2005
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2 The Value of Cash and Cross Holdings Most businesses hold cash, often in the form of low-risk or riskless investments that can be converted into cash at short notice. The motivations for holding cash vary across firms. Some hold cash to meet operating needs whereas others keep cash on hand to weather financial crises or take advantage of investment opportunities. In the first part of this paper, we will begin by looking at the extent of cash holdings at publicly traded firms and some of the motives for the cash accumulation. We will also look at how best to value these cash holdings in both discounted cash flow and relative valuation models. In the second part of the paper, we will turn to a trickier component – cross holdings in other companies. We will begin by looking at the way accountants record these holdings and the implications for valuation. We will then consider how to incorporate the value of these cross holdings in a full information environment, followed by approximations that work when information about cross holdings is partial or missing.
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3 Most firms, private and public, have assets on their books that can be considered to be non-operating assets. The first and most obvious example of such assets is cash and near-cash investments – investments in riskless or very low-risk investments that most companies with large cash balances make. The second is investments in equities and bonds of other firms, sometimes for investment reasons and sometimes for strategic ones. The third is holdings in other firms, private and public, which are categorized in a variety of ways by accountants. Finally, there are assets that do not generate cash flows but nevertheless could have value –undeveloped land in New York or Tokyo or an overfunded pension plan. When valuing firms, little or no serious attention is paid to these assets and the consequences can be serious. In this paper, we examine some of the challenges associated with valuing non-operating assets and common errors that can enter valuations of these assets. Cash and Near Cash Investments On every firm’s balance sheet, there is a line item for cash and marketable securities, referring to its holding of cash and near cash investments . Investments in short-term government securities or commercial paper, which can be converted into cash quickly and with very low cost, are considered near-cash investments. We will begin by considering the motives for holding cash and the extent of such holdings at companies. We will then discuss various approaches used to categorize cash holdings and how best to deal with cash holdings in both discounted cashflow and relative valuations.
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This note was uploaded on 12/01/2011 for the course FINANCE 350 taught by Professor Aswath during the Summer '10 term at NYU.

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cashvaluation - 1 Dealing with Cash Cross Holdings and...

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