youdoanyoftheabove.Ifyoudonotdoso,youwilldouble
count the value of the subsidiary.
Why,youmightask,dowenotvaluetheconsolidatedfirm?
You could, and in some cases because of theabsence of
information,youmighthaveto.Thereasonwewouldsuggest
separatevaluationsisthattheparentandthesubsidiariesmay
haveverydifferent characteristics—costsofcapital, growth
rates, and reinvestment rates. Valuing the combined firm
under these circumstances may yield misleading results.
There is another reason. Once you have valued the
consolidatedfirm,youwillhavetosubtractouttheportionof
theequityinthesubsidiarythattheparentcompanydoesnot
own.Ifyouhavenotvaluedthesubsidiaryseparately,itisnot
clear how you would do this.
Full Information Environment
Ifweadopttheapproachofvaluingeachholdingseparately
andtakingtheproportionateshareofthatholding,wedoneed
theinformationtocompletethesevaluations.Inparticular,we
needto have accessto thefullfinancial statementsof the
subsidiary.Ifthesubsidiaryisapubliclytradedcompanythat
operates independently, this should be relatively
straightforward.Thingsbecomemorecomplicatedwhenthe
holdingsareinotherprivatebusinessesortheaccountsofthe
parentandthesubsidiaryareintermingled.Intheformercase,
thefinancialstatementsmayexistbut notbepublic.Inthe
latter, the transactions between the parent and the
subsidiary—intracompany sales or loans—can make the
financial statements misleading. Assuming that the
informationcanbeextractedoncrossholdings,thesearethe
steps involved in valuing a company with cross holdings: