twofirms,wheretheassetsandliabilitiesofthetwofirmsare
mergedandpresentedasonebalancesheet.Theshareofthe
firmthatisownedbyotherinvestorsisshownasaminority
interestontheliabilityside ofthebalancesheet.Asimilar
consolidationoccursintheotherfinancialstatementsofthe
firmaswell,withthestatementofcashflowsreflectingthe
cumulatedcashinflowsandoutflowsofthecombinedfirm.
Thisisincontrasttotheequityapproach,usedforminority
investments, in which only the dividends received on the
investment are shown as a cash inflow in the cash flow
statement.
Here again, the market value of this investment is not
considered until theownership stake is liquidated. At that
point,thedifference betweenthemarket price and thenet
valueoftheequitystakeinthefirmistreatedasagainorloss
for the period.
ValuingCross Holdings in Other Firms—Discounted Cash
Flow Valuation
Giventhattheholdingsinotherfirmscanbeaccountedforin
three different ways, howdo you deal with each type of
holdinginvaluation?Thebestwaytodealwithallofthemis
tovaluetheequityineachholdingseparatelyandestimatethe
valueoftheproportionalholding.Thiswouldthenbeadded
ontothevalueoftheequityoftheparentcompany.Thus,to
valueafirmwith holdingsinthreeotherfirms,you would
valuetheequityineachofthesefirms,takethepercentshare
oftheequityineach,andaddittothevalueofequityinthe
parentcompany.Whenincome statementsareconsolidated,
youwouldfirstneedtostriptheincome,assets,anddebtof
thesubsidiary fromtheparent company’sfinancialsbefore