342  Moving from Enterprise Value to Value per Share institution. Add this value to the value of core operations to determine enter- prise value. Since the finance subsidiary’s debt will already be incorporated into your valuation of the finance subsidiary, do not subtract total debt from the parent company’s enterprise value to determine equity value. Subtract only general obligation debt unrelated to the finance subsidiary. We present the valuation of a company with a finance subsidiary in Chapter 19, and we cover bank valuation in Chapter 38. Discontinued Operations Discontinued operations are businesses being sold or closed. The earnings from discontinued operations are explicitly shown in the income statement, and the associated net asset position is disclosed on the balance sheet. Because discontinued operations are no longer part of a company’s operations, their value should not be modeled as part of free cash flow or included in the DCF value of operations. Under U.S. GAAP and IFRS, the assets and liabilities as- sociated with the discontinued operations are written down to their fair value and disclosed as a net asset on the balance sheet, so the most recent book value is usually a reasonable approximation.8 Excess Real Estate Excess real estate and other unutilized assets are assets no longer required for the company’s operations. As a result, any cash flows that the assets gener- ate are excluded from the free-cash-flow projection, and the assets are not included in the DCF value of operations. Identifying these assets in an out- side-in valuation is nearly impossible unless they are specifically disclosed in the company’s footnotes. For that reason, only internal valuations are likely to include their value separately as a nonoperating asset. For excess real es- tate, use the most recent appraisal value when it is available. Alternatively, estimate the real estate value either by using a multiple, such as value per square meter, or by discounting expected future cash flows from rentals at the appropriate cost of capital. Of course, be careful to exclude any operating real estate from these figures, because that value is implicitly included in the free- cash-flow projections and value of operations. We do not recommend a separate valuation for unutilized operating assets unless they are expected to be sold in the near term. If the financial projections for the company reflect growth, the value of any underutilized assets should instead be captured in lower future capital expenditures. 8 Any upward adjustment to the current book value of assets and liabilities is limited to the cumulative historical impairments on the assets. Thus, the fair market value of discontinued operations could be higher than the net asset value disclosed in the balance sheet. Valuing Nonoperating Assets  343 Excess Pension Assets Surpluses in a company’s pension funds show up as net pension assets on the balance sheet and typically reported at market value.9 (Small amounts are typically embedded within other assets.) On an after-tax basis, the pension’s value depends on management’s plans. If pensions are expected to be dis- solved soon, subtract liquidation taxes—typically set higher than the statutory tax rate—from the market value of excess pension assets. Otherwise, subtract taxes at the statutory rate, which reflects the need for lower future contribu- tions. For details on pension accounting and valuation, see Chapter 23. Tax Loss Carryforwards When a company generates a loss in a given year, it can accumulate those losses and net them against future income, thereby reducing future taxes.10 This is known as a tax loss carryforward. Since tax savings will increase future cash flows, estimate their value using discounted cash flow, and add your result to the company’s value of operations. The potential tax loss carryforward is recorded on the balance sheet as a deferred-tax asset.11 Use the deferred-tax asset as a starting point to value the tax loss carryforwards. If the company is unlikely to use the tax loss carryfor- ward, the company will record a valuation allowance against the deferred- tax asset. Both numbers can be found in the note on taxes that accompanies the company’s financial statements. The company’s valuation allowance will reflect its current expectations of future profitability, which may be different from your projections, so use caution in adopting the company’s calculation. If you develop multiple scenarios to value operations, estimate your own allow- ance against the deferred-tax asset based on the probability of the asset being realized under each scenario. Because tax savings are recorded on an undiscounted basis, apply dis- counted cash flow to estimate their value as of today. Ideally, you would discount tax savings at a cost of capital that perfectly matches their risk. In practice, use the weighted average cost of capital. This will appropriately counter the value of operating taxes embedded in your value of operations. To estimate the present value, forecast the year-by-year tax savings based on your projected earnings for the company. Unless income by geography is 9 Under IFRS, companies can still report excess pension assets at book value. If pensions are not marked to market, search the company’s pension footnote for the value of excess pension assets. 10 Tax policy varies widely across countries. Check local tax policy to determine if, how, and when you can net past losses against future income. 11 As detailed in Chapter 11, we classify deferred taxes into tax loss carryforwards, operating deferred taxes, and nonoperating deferred taxes. Only tax loss carryforwards should be valued separately. The other two accounts are either incorporated into free cash flow via cash operating taxes or valued as part of the account that generated the deferral.