Damodaran on Valuation

Chapter 10. Cash, Cross Holdings, and Other Assets

Most firms, private and public, have assets on their books that can be considered to be nonoperating assets. The first and most obvious example of such assets is cash and near-cash investments—investments in riskless or very low-risk investments that most companies with large cash balances make. The second is investments in equities and bonds of other firms, sometimes for investment reasons and sometimes for strategic ones. The third is holdings in other firms, private and public, which are categorized in a variety of ways by accountants. Finally, there are assets that do not generate cash flows but nevertheless could have value—undeveloped land in New York or Tokyo or an overfunded pension plan. When valuing firms, little or no serious attention is paid to these assets, and the consequences can be serious. In the earlier chapters on discounted cash flow and relative valuation, we referred in passing to these assets. In this chapter, we examine some of the challenges associated with valuing nonoperating assets and common errors that can enter valuations of these assets.