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Dealing with Cash, Cross Holdings and Other Non-Operating Assets: Approaches and Implications

55 Pages Posted: 14 Nov 2005  

Aswath Damodaran

New York University - Stern School of Business

Date Written: September 30, 2005

Abstract

Most businesses hold cash, often in the form of low-risk or riskless investments that can be converted into cash at short notice. The motivations for holding cash vary across firms. Some hold cash to meet operating needs whereas others keep cash on hand to weather financial crises or take advantage of investment opportunities. In the first part of this paper, we will begin by looking at the extent of cash holdings at publicly traded firms and some of the motives for the cash accumulation. We will also look at how best to value these cash holdings in both discounted cash flow and relative valuation models. In the second part of the paper, we will turn to a trickier component - cross holdings in other companies. We will begin by looking at the way accountants record these holdings and the implications for valuation. We will then consider how to incorporate the value of these cross holdings in a full information environment, followed by approximations that work when information about cross holdings is partial or missing.

Keywords: cash, cross holdings, non-operating assets

JEL Classification: G12, G24, G34

Suggested Citation

Damodaran, Aswath, Dealing with Cash, Cross Holdings and Other Non-Operating Assets: Approaches and Implications (September 30, 2005). Available at SSRN: https://ssrn.com/abstract=841485 or http://dx.doi.org/10.2139/ssrn.841485

Aswath Damodaran (Contact Author)

New York University - Stern School of Business ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0340 (Phone)
212-995-4233 (Fax)

HOME PAGE: http://www.damodaran.com

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