5 percent holding in a subsidiary, we should be
adding 5 percentofthecompany’sdebtandcashto
thedebtandcashthatweusetocomputeenterprise
value.Iftheobjectiveisto stripoutthesubsidiary
entirely,weshouldbenettingoutthemarketvalueof
equityinthesubsidiary(fromthe 5 percentholding)
to obtain themarket valueof equity in the parent
company.- Addingminority interest from thebalancesheetto
enterprise valuetoobtainthetotal marketvalue of
theconsolidatedcompany.Withmajorityholdingsin
othercompanies,wefaceadifferentproblem.When
aparentcompanyholds 55 percentofasubsidiary,it
is required to fully consolidate its financial
statements.Asaconsequence,thedebtandcashthat
are used to compute enterprise value include 100
percentofthecashanddebtofthesubsidiary(rather
thanjustthe 55 percentholding)butthemarketvalue
ofequityisreflective ofonly the 55 percentofthe
equity.Toincludethevalueofthe 45 percentofthe
equitythatisnotbeingcounted,manyanalystsadd
minorityinterests(whichistheaccountant’smeasure
ofthevalueofthe 45 percentheldbyoutsiders)to
enterprise value. The problem, however, with
minorityinterestsisthatitisinbookvaluetermsand
willusuallyunderstatethemarketvalueofequityin
thesubsidiary.Asindiscountedcashflowvaluation,
estimatingamarket valuefortheminority interests
andaddingittotheenterprisevaluewillprovidea
better measure of overall value.
Insummary,theconsolidatedvalueofacompany,including
its cross holdings can be obtained by the following