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¨Liability side: 40% of Company C owned by outside shareholders (Non-controllinginterest) with a book value of $45 million.¨Both Company B and C are separately listed, where:Market cap of Company B = $500mm, and Market cap of Company C = $200mm156
157An Exercise in Valuing Investment Holdings¨Equity Value of Company A:¨Intrinsic value of the consolidated operaPng assets + Value of Company B –Market Value of Debts – Value of Non-Controlling Interest¨= $1,000mm + 10% * ($500mm) - $280mm – 40% * ($200mm)¨= $1,000mm + $50mm - $280mm - $80mm = $690mm¨Order of preferencein the valuaPon of investment holdings:1.Intrinsic value based on DCF (however, this may not be pracPcable or necessaryif the required data are not available or if the amount involved is not material);2.Market value;3.Adjusted book value (mulPply the book value on the balance sheet by Industryaverage Price to Book Value raPo).¨Adjusted book value: For example, assuming that Company B is not listed and thatit is in the retailing business. If the retailing industry has an average P/B raPo of1.5 Pmes, then the adjusted book value of Company B = $30mm * 1.5 = $45mm.157
1583. Other Non-OperaPng Assets¨Assets that you should not be counPng (i.e. adding to the DCFvalue)¤If an asset is contribuPng to free cash ﬂows, you cannot treatthis asset as a non-operaPng asset. For example, you should notcount the properPes which the firm uses as oﬃces.¨Assets that you can count (or add to the DCF value):¤Overfunded pension plans: If the firm has a defined benefit planand the assets exceed the expected liabiliPes.¤UnuPlized assets: If the firm has assets or properPes that arenot uPlized to generate free cash ﬂows (vacant land, forexample), you can assess market value for these assets and addthem to the value of the firm.158
1594. DefiniPon of Debts¨Debts generally has the following characterisPcs:¤Commitment to make payments in the future,¤The interest payments are tax deducPble,¤Failure to make the payments can lead to either default or lossof control of the firm to the party to whom payments are due.¨Defined as such, debts should include:¤All interest bearing liabiliPes, short term as well as long term,¤All leases, operaPng as well as capital.¨Debts should not include:¤Accounts payable or supplier credit (as these are operaPngliabiliPes).¤Deferred Income Tax LiabiliPes (as these are Equity Equivalents).159
160Other LiabiliPes¨Underfunded pension liabiliPes should be treated asdebt equivalents.¨ConPngent liabiliPes:For example, a potenPal liability from a lawsuit that has notbeen decided - you should esPmate the expected value ofthese conPngent liabiliPes:¤Expected value of conPngent liability = Probability that theliability will occur * EsPmated value of liability¤These liabiliPes should be deducted from the FirmValue to arrive at the Equity Value.