Cash and Cross Holding Flashcards
Proportion of cash balance which is wasting cash
1 – Book interest rate/ Market interest
rate
Book Interst rate on average cash balance=Interest Income/Average Cash Balance
Estimated Value of Cash Invested
(Interest rate on Cash Investment X Cash Value)/Market riskless rate
Treatment of Non Wasting Cash
Add Back on to the value of the operating assets of the firm.
Dealing with Cash in Valuation (FCFF) Consolidate Method
- Adjust Beta of the firm
- Add back Interest Income from Cash to Net Income
Dealing with Cash in Valuation (FCFF) separation method
Seperate the Cash and marketable securities from operating assets and value individually
2 Reason why Gross Debt and Net Debt approach differ in value
- Different Cost of debt should be used.
- Net Debt nullifies tax advantages
2 pausible reason cash is discounted
- Cash invested below marekt rate
- Distrust of Management with Cash
2 Common Mistakes dealing with cash
- Double counting csh by including income from cash in cash flow and add back to the value at the end
- Miscounting Cash, apply wrong discount rate to the income from cash. By including cash in cash flow then discount it by operating discount rate.
Solution to cash in relative valuation
- P/E (adjust for cash)=Market Capitalization-Cash/Net Income-Interest Income from Cash
- P/B(adjust for cash)= MarketCapitalization-Cash/Book Value of Equity - Cash
Treatment of trading securities of unrealized gain/loss
Unrealized gain/loss included on income statement thus reflected in retained earnings within owner’s equity
Treatment of available for sale securities
Unrealized gain treated as part of OTHER comprehensive Income within Owner Equity
Treatment of held to maturities securities
Securities are measured at COST no unrealized gain
Ev/EBITDA(Adjusted)
Market Value of Equity +Parent Debt -Parent Cash -Market Value of All Cross Holdings/ Parent EBITDA
Treatment of Unutilized Asset
