Calculate present value of expected cash flow to shareholder
When valuing the shares of my company, I calculate the present value of the expected cash flows to shareholders moreover I add to the result obtained cash holdings and liquid investment. Is that correct?
Expert
The company is incorrect to add those, if it is not going to distribute the cash holdings in the near future. This is also incorrect to add the complete value of the cash holdings since the company requirements part of it to go on with its operations as the minimum cash holdings.
This could be correct to add all the cash holdings only in the following cases as follows:
a) When the interest rate received for the treasury to equal the interest rate paid for debt;
b) When the cash holdings were distributed instantly, and
c) When the cost of debt needed to compute the WACC was the weighted average of the cost of debt and the interest rate received for the treasury in this a case, the helpful debt in order to compute the ratio debt/shareholder’s equity has to be the debt minus the cash holdings.
The value of the excess cash holdings but over the essential amount in order to go on with the operations is lower than the book value when the interests received for the treasury are lower than interests paid for debt.
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