Liability side 40 of company c owned by outside

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¨ Liability side: 40% of Company C owned by outside shareholders (Non-controlling interest) 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 = $200mm 156
157 An 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 preference in the valuaPon of investment holdings: 1. Intrinsic value based on DCF (however, this may not be pracPcable or necessary if 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 Industry average Price to Book Value raPo). ¨ Adjusted book value: For example, assuming that Company B is not listed and that it is in the retailing business. If the retailing industry has an average P/B raPo of 1.5 Pmes, then the adjusted book value of Company B = $30mm * 1.5 = $45mm. 157
158 3. Other Non-OperaPng Assets ¨ Assets that you should not be counPng (i.e. adding to the DCF value) ¤ If an asset is contribuPng to free cash flows, you cannot treat this asset as a non-operaPng asset. For example, you should not count 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 plan and the assets exceed the expected liabiliPes. ¤ UnuPlized assets: If the firm has assets or properPes that are not uPlized to generate free cash flows (vacant land, for example), you can assess market value for these assets and add them to the value of the firm. 158
159 4. 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 loss of 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 operaPng liabiliPes). ¤ Deferred Income Tax LiabiliPes (as these are Equity Equivalents). 159
160 Other LiabiliPes ¨ Underfunded pension liabiliPes should be treated as debt equivalents. ¨ ConPngent liabiliPes: For example, a potenPal liability from a lawsuit that has not been decided - you should esPmate the expected value of these conPngent liabiliPes: ¤ Expected value of conPngent liability = Probability that the liability will occur * EsPmated value of liability ¤ These liabiliPes should be deducted from the Firm Value to arrive at the Equity Value.

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