Read more on accounting
for crossholdings and valuing crossholdings
If you are valuing the firm (rather
than equity), you began with operating income as your measure
of earnings to get to cashflows. Therefore, you have not valued
any assets whose earnings are not part of operating income.
The first of these assets is cash and marketable securities - interest
income from these holdings shows up below the operating
income line. You have to add the value of cash and marketable
securities to your operating asset value. The second is minority holdings
in other companies. The income from these cross holdings
is variously accounted for but is almost never part of operating
income. If you wanted a complete valuation, you would have
to value each of these subsidiary companies individually and
take the share of each company that your company owns into
consideration. If you have a majority holding in another company,
you have a different problem since you are required to consolidate
100% of that company into your financials. If you want your
valuation to hold up to scrutiny, it is best to remove the
consolidated subsidiary from your financials, value the parent
company first and then add the majority stake of the consolidated
subsidiary to this value.
If you are valuing equity, using
net income or earnings per share as your starting point, you
have valued cash and cross holdings implicitly since the income
from these holdings is part of net income. The problem, though,
is that you have also implicitly assumed that the share of
income generated by these assets (cash and cross holdings)
will not change over time. This is a dangerous assumption.
It is safer to remove the income from cash and cross holdings
from your net income, value equity based upon this adjusted
net income and then add on cash and your share of cross holdings
at the end of the process.