Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

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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

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