equitytofundafirm’s investmentsormismatchingdebtto
assetscanresultinahighercostofcapitalandalowerfirm
value.
5.Cash,crossholdings,andothernonoperatingassets.Once
theoperating assetshavebeenvalued,wegenerallyadd on
thevalueofcash,crossholdings,andotherassetsownedby
thefirm.Whiletheconventionalviewisthatcashholdings
areneutral,theevidencewepresentedinChapter 10 suggests
thatcash,atleastinthehandsofpoorlyruncompanies, is
viewedasvaluedestructive.Thesamecanbesaidaboutcross
holdings in other companies.
Insummary,then,tovalueanyfirm,webeginbyestimating
howlonghighgrowthwilllast,howhighthegrowthratewill
beduringthatperiod,andthecashflowsduringtheperiod.
Weendbyestimatingaterminalvalueanddiscountingallof
the cash flows, including the terminal value, back to the
presenttoestimate thevalueoftheoperatingassets ofthe
firm. Adding back the value of cash, cross holdings, and
nonoperating assets yields the firm’s value. Figure 13.1
summarizes the process and the determinants of a firm’s
value.
FIGURE 13.1Determinants of Firm Value