Beruflich Dokumente
Kultur Dokumente
Valuation Issues
Minority Interest be a priority payment over the Parents Equity? A. Trick question!! Minority Interest is not payable at all, as it simply does not belong to the Parent at all! However, in a way, Minority Interest is being used to Fund the Consolidated Statements. That is to say, the Sales, Assets etc. have some contribution coming from the Minority as well. This is a result of 100% Consolidation, which caused H to include amounts that did not belong to it! Put Simply, Minority Interest is certainly not Debt (no mandatory payments, fixed life etc.) While it does satisfy conditions for being Equity! (The Minority Shareholders in the Consolidated Company were anyway part of Equity in the Subsidiary). Now that we know Minority Interest falls under Equity, we need to simply include Minority Interest with Shareholders Equity in all relevant ratios.
Valuation Issues
Valuation Issues
Valuation Issues
While calculating Free Cash Flows & Continuing Value, for a consolidated entity, Minoritys contribution is already accounted for (despite Minority Interest being a below the line item). Implying, WACC automatically includes Minority Interest. In Step 4 & 5: Now, Value of Operations includes the Minoritys share as well. Entailing that, Enterprise Value measures 100% of Parent & 100% of all Subsidiaries. In Step 6: Thanks to the Consolidated financials, the Minority has been Automatically Valued and now must be reduced from the Enterprise Value to derive the Enterprise Value attributable to the Parent alone. But note, that the Fair/Intrinsic Value (and not Book Value) of Minorities must be reduced from it, else you risk undervaluation! To value Minoritys Interest, you may choose a Comparable P/B multiple & then multiply it by Book Value of the Minority (i.e. Minority Interest in Balance Sheet) or, use a Comparable P/E multiple & multiply it by Minority interest in the Income Statement. Or use the DCF for each such Subsidiary. Finally: Other Non-equity Claims (Debt, Preference Capital etc.) must be subtracted to derive Equity Value attributable to the Parents Shareholders.
Valuation Issues
? While calculating EV under Comparable Valuation: Why are Excess Cash & Cash Equivalents subtracted? Should they be considered at Market or Book Value?
Such items are treated as Cash or Near cash and hence can be used to pay down debt. What is Excess Cash and why not simply use Total Cash? Excess Cash is defined as Total Cash (in Balance Sheet) Operating Cash (i.e. Minimum required cash) This is because, operating cash is required to sustain operations (working capital) and manage contingencies (anomalies such as strikes, lockouts etc). If Total Cash is used to pay down debt, the company will have nothing left for working capital requirements and contingencies! Secondly, Cash at Book Value or Market Value is the same i.e. Always at Present Value! Treatment of Cash Equivalents: Near Cash items must include investments that are actively traded, available for Sale and held to maturity. Being non-critical in most cases, valuing petty investments is not feasible. The process of determining fair value of such investments may involve valuing hundreds or even thousands of investments and must be strictly left to Purists! Hence we recommend using Book Value.
? While calculating EV under Comparable Valuation: Why is Investments in Associates subtracted? Should it be considered at Market or Book Value?
Ideally, ownership between 21-49% being a significant investment should be considered at Market Value (if the Associate is a listed entity). Or the Fair value of which, may be determined using any of the popular valuation approaches. However, it is observed that most analysts use Book Value. Coming to think of it, the Associates had no contribution in the denominator of EV multiples (i.e. Sales, EBITDA etc.). However, they do have a contribution in Market Value (as a result of increasing EPS and creating value for Shareholders!) and hence also inflate the EV. Hence we recommend deducting market Value of such investments, if publicly available. Else, derive fair value of such investments before subtracting from EV.
? While calculating EV under Comparable Valuation: Why is Minority Interest added? Should it be considered at Market or Book Value?
Minority Interest should be added because in a way, it is a Source of financing the Consolidated Company. An often debated issue is whether Book or Market Value must be considered for such addition. In practice, just like in the case of Investments in Associates, most analysts use Book Value. (Perhaps under the pretext that it is a non significant i.e. non critical item?). However, it must be noted that in that case it is assumed that the Minoritys is worth nothing more than its Book Value. Which make EV multiples = Book multiples! Put Simply, If multiples for a 100% Consolidated company must be calculated it is implicit that the numerator (i.e. Value metric) must be taken at Market Value, else there will be tendency to undervalue a profit making Subsidiary. Basically, all sources, of funding a Companys Financials should be taken at Market Value and Investment in Associates or Minority Interest are no exception!
Valuation Issues
Note: It must be kept in mind that the resulting valuation multiple will be used for a 100% Consolidated company! If Valuation of a Parents contribution alone needs to be measured, Minority Interest (at Market Value) must be subtracted from the numerator (i.e. Enterprise Value) while the denominator must also show Parents share alone (i.e. Minoritys stake must be proportionately subtracted from Sales, EBITDA etc.)
? But why is the treatment of Equity Investments different while performing a DCF Valuation as against the Comparables Approach?
The so called discrepancy in valuation treatment is an illusion! This is an altogether different subject and is dealt here.