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

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32 Inaddition,Segoviaowns15%ofLatinWorks,arecord
andCDcompany.Theseholdingshavebeencategorized as
minority passive investments, and the dividends from the
investmentareshownaspartofSegovia’snetincomebutnot
as part of its operating income. LatinWorks reported
operatingincomeof$75milliononcapitalinvestedof$250
millioninthecurrentyear;thefirmhas$100millionindebt
outstanding. We will assume the following:



  • The cost of capital for Segovia Entertainment,
    withoutconsideringits holdingsineitherSeville or
    LatinWorks, is10%. Thefirmis in stable growth,
    with operating income (again not counting the
    holdings) growing 5% a year in perpetuity.

  • SevilleTelevisionhasacostofcapitalof9%andit
    also is in stable growth, with operating income
    growing 5% a year in perpetuity.

  • LatinWorkshasacostofcapitalof12%anditisin
    stablegrowth,withoperatingincomegrowing4.5%a
    year in perpetuity.

  • Noneofthefirmshasasignificantbalanceofcash
    and marketable securities.

  • The tax rate for all of these firms is 40%.


We can value Segovia Entertainment in three steps:


1.ValuetheequityintheoperatingassetsofSegovia,without
countingany of theholdings. To dothis, wefirst haveto
cleanse the operating income of the consolidation.

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