atanestimatedvalue.Thesamereasoningapplieswithfirm
andenterprisevalue.Ifourobjectiveistoestimatethetotal
marketvalueofafirm,weshouldbeaddinginthevalueof
equityoptionstothemarketcapitalizationtogettothemarket
value of equity.
Cross Holdings
In our discussion of discounted cash flow valuation in
Chapter 6, we briefly referenced the problems created by
crossholdings, a topicwe willreturnto in moredepthin
Chapter 10. Cross holdings can become an issue when
measuring in firm value and enterprise value multiples as
well. Thetotal value of a firmwill include the estimated
marketvaluesofbothitsminorityandmajoritycrossholdings
in othercompanies.From apractical standpoint,though, it
may be easier to work with the value of just the parent
company,obtainedbynettingoutthemarketvaluesofcross
holdings in other companies. There are several common
mistakesthat analystsmakein dealingwith crossholdings
that can result in misleading conclusions:
- Countingequityportionofminorityholdingsbutnot
debtandcash.Withminorityholdings,onecommon
error arises from thefact that themarket value of
equity of the parent company incorporates the
estimatedmarketvalueofminorityholdingsinother
companiesbutthedebtandcashvaluesdonot,since
theycomefromtheparentcompany’sbalancesheet.
Iftheobjectiveistocounttheproportionateshareof
thesubsidiaryinwhichwehavetheminorityholding,
weshouldbeconsistent.Inotherwords,ifthemarket
valueofequityoftheparentcompanyincorporatesa