Companies invest in each other for a variety of reasons. The accounting for these cross holdings are specified by the SEC guidelines. Generally speaking, a company has less than 50% ownership of another firm and does not exert influence, the investment is considered as a minority interest. When the SEC prescribed conditions for minority interest are met, the financials of the subsidiary company are not consolidated in the parent company. When you are valuing the parent company, how does the value of minority interest get reflected in your DCF valuation model? We address this question “Where does minority interest feature in your DCF valuation?” here.
If the company you are valuing has a minority interest in subsidiaries, the value of the ownership stake in a subsidiary is not likely to be included in your DCF valuation. This is because your DCF valuation usually features only operating cash flows. The subsidiaries or investments must be valued separately, and your company’s minority interest must be added back to your DCF valuations.