cash - 6. Tying up Loose Ends Aswath Damodaran 145 Dealing...

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Aswath Damodaran 145 6. Tying up Loose Ends
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Aswath Damodaran 146 Dealing with Cash and Marketable Securities n The simplest and most direct way of dealing with cash and marketable securities is to keep it out of the valuation - the cash flows should be before interest income from cash and securities, and the discount rate should not be contaminated by the inclusion of cash. (Use betas of the operating assets alone to estimate the cost of equity). n Once the firm has been valued, add back the value of cash and marketable securities. If you have a particularly incompetent management, with a history of overpaying on acquisitions, markets may discount the value of this cash.
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Aswath Damodaran 147 How much cash is too much cash? Cash as % of Firm Value: July 2000 0 200 400 600 800 1000 1200 0-1% 1-2% 2-5% 5-10% 10-15% 15-20% 20-25% 25-30% >30%
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148 The Value of Cash n Implicitly, we are assuming here that the market will value cash at face value. Assume now that you are buying a firm whose only asset is marketable securities worth $ 100 million. Can you ever consider a
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cash - 6. Tying up Loose Ends Aswath Damodaran 145 Dealing...

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