Companies invest in each other for a variety of reasons. The accounting for these cross-holdings is specified by the SEC guidelines. Generally speaking, a company has more than 50% ownership of another firm and/or exerts influence, the investment is considered as a majority interest. When the SEC prescribed conditions are met, the financials of the subsidiary company are consolidated in the parent company’s financial statements. When you are valuing the parent company, how does the value of majority interest and minority interest/shareholders get reflected in your DCF valuation model? We address this question “Where does majority interest feature in your DCF valuation?” here.
If your company has a majority holding in another company, the company likely consolidated the subsidiary’s financials into the company’s financials. So, when valuing the company, you must be aware of the additional cash flows featuring the DCF valuation. You can deal with it in two ways: Either take only the parent company’s cash flows and value the company first and then add the value of the parent company’s subsidiary ownership percentage. Or value the entire cash flows and remove value of the minority stake from the DCF valuation.