thebookinterestrateearnedoncashwillbelowerthanthe
marketinterestrate.Considerasimpleexample.CyberTech
Inc.hadanaveragecashbalanceof$200millioninthe 2004
financialyearanditreportedinterestincomeof$4.2million
fromtheseholdings.IftheaverageTreasurybillrateduring
theperiodwas2.25percent,wecanestimatethewastingcash
component as follows:
Thus,6.67percentof$200million($13.34million)wouldbe
treatedas wasting cash and considered,like inventoryand
accounts receivable, to be partof workingcapital, but the
remaining$186.66millionwouldbeviewedasnonwasting
cashandbeaddedtothevalueoftheoperatingassetsofthe
firm.
Dealing with Cash Holdings in Valuation
Whilevaluingcashinafirmmayseemlikeatrivialexercise,
therearepitfallsintheanalysisthatcancauselargevaluation
errors.Inthissection,weconsiderhowbesttodealwithcash
in both discounted cash flow and relative valuations.
Valuing Cash in a Discounted Cash Flow Valuation