Damodaran on Valuation

10.4. OTHER NONOPERATING ASSETS

Firms can have other nonoperating assets, but they are likely to be of less importance than those listed so far. In particular, firms can have unutilized assets that do not generate cash flows and have book values that bear little resemblance to market values. An example would be prime real estate holdings that have appreciated significantly in value since the firm acquired them, but produce little if any cash flows. An open question also remains about overfunded pension plans. Do the excess funds belong to stockholders and, if so, how do you incorporate the effect into value?

10.4.1. Unutilized Assets

The strength of discounted cash flow models is that they estimate the value of assets based on expected cash flows that these assets generate. In some cases, however, this can lead to assets of substantial value being ignored in the final valuation. For instance, assume that a firm owns a plot of land that has not been developed and that the book value of the land reflects its original acquisition price. The land obviously has significant market value but does not yet generate any cash flow for the firm. If a conscious effort is not made to bring the expected cash flows from developing the land into the valuation, the value of the land will be left out of the final estimate.

How do you reflect the value of such assets in firm value? An inventory of all such assets (or at least the most valuable ones) is a first step, followed up by estimates of market ...