Damodaran on Valuation

10.5. CONCLUSION

Investments in cash, marketable securities, and other businesses (cross holdings) are often viewed as afterthoughts in valuation. Analysts spend little time assessing the impact of these assets on value but they do so at their own risk. In this chapter, we first considered the magnitude of investments in cash at firms and the motivations for accumulating this cash. We followed up by looking at how best to assess the value of cash in both discounted cash flow and relative valuation. Cash is riskless and generally earns low rates of return, and this makes it different from the operating assets of a firm. The safest way to deal with cash is to separate it from operating assets and to value it independently in both discounted cash flow and relative valuation. We also considered how to incorporate the values of financial investments, cross holdings, and other nonoperating assets into firm value.