The Proper Treatment of Cash Holdings in DCF Valuation Theory and Practice

Q4 Economics, Econometrics and Finance
James L. Canessa, G. Jarrell
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Abstract

Abstract The discounted cash flow (“DCF”) model is widely used for valuing corporate assets. But valuable assets that do not generate cash flows will be missed by the DCF approach. Because cash interest income is generally not included in the projected net cash flows of operating assets, the value of cash is regarded as a non-operating asset whose value must be added to the DCF enterprise value. Unfortunately, it has become standard practice on Wall Street and for the courts to exclude some amount of cash from non-operating assets on the basis that it will be used to finance the immediate operations of the business. The exclusion of so-called “operating” or “working-capital” cash is widely accepted as necessary and is recommended in virtually all valuation texts and treatises. We disagree and show that all cash should generally be added as a non-operating asset, except in unique circumstances where “wasting cash” is not earning a fair market return. We explain that excluding operating cash is correct only if either the interest income on cash is included in the net cash flows projections used to compute DCF value, or if the specific (near-term) operating expenses that will be covered by operating cash are excluded from the net cash flow projections. In either case, the full economic benefits of owning operating cash are fully reflected in the DCF enterprise value of the company, causing the DCF value to be higher by the exact amount of operating cash that is excluded. We call this the symmetry principle of operating cash. In practice, neither condition is normally met, so that all cash should generally be treated as a non-operating asset.
DCF估值中现金持有量的正确处理理论与实践
贴现现金流(discounted cash flow,简称DCF)模型被广泛用于企业资产估值。但是,不产生现金流的有价值资产将被DCF方法忽略。由于现金利息收入一般不包括在经营性资产的预计净现金流量中,因此现金的价值被视为非经营性资产,其价值必须加到DCF企业价值中。不幸的是,这已经成为华尔街和法院的标准做法,从非经营性资产中排除一定数量的现金,理由是这些现金将用于为企业的直接运营提供资金。排除所谓的“经营”或“营运资本”现金被广泛认为是必要的,并且在几乎所有估值文本和论文中都被建议。我们不同意并表明所有现金通常应作为非经营性资产添加,除非在“浪费现金”无法获得公平市场回报的特殊情况下。我们解释说,排除经营性现金是正确的,只有当现金的利息收入包括在用于计算DCF值的净现金流量预测中,或者将由经营性现金覆盖的特定(近期)经营费用从净现金流量预测中排除。在这两种情况下,拥有经营性现金的全部经济效益都充分体现在公司的DCF企业价值中,导致DCF值比排除在外的经营性现金的确切数额高。我们称之为经营性现金的对称原则。在实践中,这两个条件通常都不满足,因此所有现金通常应被视为非经营性资产。
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来源期刊
Journal of Business Valuation and Economic Loss Analysis
Journal of Business Valuation and Economic Loss Analysis Economics, Econometrics and Finance-Finance
CiteScore
0.40
自引率
0.00%
发文量
3
期刊介绍: The Journal of Business Valuation and Economic Loss Analysis (JBVELA) is a refereed academic journal that publishes continuously throughout the year and is co-edited by Bradley Ewing and James Hoffman. The mission of the Journal of Business Valuation and Economic Loss Analysis is to improve the practice of business valuation, economic loss analysis, and risk management by helping to inform academics, practitioners, and attorneys about theoretical and practical developments in these fields.
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