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

holdings would be $500 million. In fact, this

approachcanbegeneralizedtoestimatethevalueof

complexholdingswhereyoulacktheinformationto

estimatethevalueforeachholdingoriftherearetoo

many such holdings. For example, you could be

valuing a Japanese firm with dozens of cross

holdings. Youcouldestimatea valuefor thecross

holdingsbyapplyingamultipleofbookvaluetotheir

cumulative book value.

Note that using the accounting estimates of the holdings,
which is the most commonly used approach in practice,
shouldbealastresort,especiallywhenthevaluesofthecross
holdings are substantial.

Valuing Cross Holdings in Other Firms—Relative Valuation

Muchofwhatwassaidaboutcashanditseffectsonrelative
valuationcanbesaidaboutcrossholdings aswell,but the
solutions arenot as simple. To begin with, consider how
different types of holdings affect equity multiples.

• Minority passive investments. Only dividends
  receivedontheseinvestmentsareshownasearnings
  in theincome statement.Sincemost firmspay out
  lessindividendsthantheyhaveavailableinearnings,
  thisislikelytobiasupwardtheprice-earningsratios
  forfirmswithsubstantial minoritypassiveholdings
  (since the market value of equity will reflect the
  value of the holdings but the net income will not).


• Minorityactiveandmajorityholdings.Theseareless
  problematic, because thenetincome should reflect
  the proportion of the subsidiary’s earnings.