30%thatthemanagement willtryto acquire anotherfirm.
Further,assumethatthemarketanticipatesthatthefirmwill
overpayby$50milliononthisacquisition.Thecashwillthen
be valued at $185 million.
Thetwofactorsthatdeterminethisdiscount—theincremental
likelihoodofapoorinvestmentandtheexpectednetpresent
valueoftheinvestment—arelikelytobebasedoninvestors’
assessmentsofmanagementquality.Cashismorelikelybe
discountedinthehandsofmanagementthatisperceivedtobe
incompetent than in the hands of good managers.
Separate versus Consolidated Valuation: Summary
Itiseasytoseewhysomanyvaluationsmakemistakeswith
cash holdings. Thedifferences betweentheapproaches are
subtle and the inputs have to be fine-tuned to reflect the
approachused.Attheriskofrepeatingwhathasbeensaidin
the last few pages, we have summarized the differences
between the approaches inTable 10.1.
We are trying to avoid two mistakes. The first is double
counting cash, byincluding income from cash in thecash
flowsandalsoaddingbackcashtothevalueattheend.The
otherismiscountingcash,whichoccurswhenyouapplythe
wrongdiscountratetotheincomefromcash.Thishappens,
forinstance,whenyouincludeinterestincomefromcashin
thecashflowsanddiscountthecashflowsbackatacostof
equitythatreflectsonlytheoperatingassets.Atamoresubtle