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

level,italsohappenswhenwefailtoadjustthecostofdebtin
the gross debt and net debt approaches to reflect our
assumptions about how cash is funded.

Dealing with Cash in a Relative Valuation

Ifanalystsaresometimesimprecisewhendealingwithcash
in a discounted cash flow valuation, they are often even
sloppierinincorporatingcashintorelativevaluation.Inthis
section, we willexaminehow best to considercash when
computing multiples and comparing them across companies.

TABLE 10.1 Differences between Cash Valuation
Approaches

Consolidated ValuationSeparate Valuation

Objective

Valuefirmas a whole

withcashaspartofthe

assets.

Valuenoncash assets

separately from cash.

Earnings

Should include interest

income from cash and

marketable securities.

Should exclude

interest income from

cash and marketable

securities. (If using

net income to

estimate cash flows

toequity,youneedto

remove after-tax

interest income.)

Reinvestment

Should consider

reinvestment in both

operating assets and

cash.

Reinvestment should

be only in operating

assets.