398  Valuation by Parts
do not allocate the costs. They should be retained as a corporate cost center 
and valued separately for two reasons. First, allocating corporate costs to busi-
ness units reduces your ability to compare them with pure-play business unit 
peers that don’t incur such costs (most business units already have their own 
chief executives, CFOs, and controllers who are comparable to pure-play com-
petitors). Second, keeping the corporate center as a separate unit reveals how 
much of a drag it creates on the company’s value.
For ConsumerCo, the unallocated corporate costs are estimated at $83 mil-
lion, around 1.7 percent of revenue, with a present value amounting to about 
10 percent of enterprise value. The present value of corporate costs is often in 
the range of 10 to 20 percent of enterprise value for multibusiness companies.
Dealing with Intercompany Transactions
Sometimes business units provide goods and services to one another, incur 
intragroup payables and receivables, and borrow and lend funds to a group 
treasury. To arrive at consolidated corporate results, accountants eliminate the 
internal revenues, costs, and profits, as well as internal assets and liabilities, 
to prevent double-counting. Only revenues, costs, assets, and liabilities from 
transactions with external parties remain at the consolidated level. Exhibit 19.6 
shows how the 2020 reorganized financials for ConsumerCo’s businesses are 
consolidated with the accounts of the parent company, ConsumerCo Corpo-
ration. In this example, ConsumerCo Corporation has no business activities 
and only holds the equity stakes in the business subsidiaries and most of the 
group’s debt.
Intercompany Sales and Profits  ConsumerCo’s private-label segment sells 
partially finished products to the open market but also to the branded-prod-
ucts unit, generating $500 million of internal sales in 2020 (in Exhibit 19.6, 
see the first line under Eliminations I). If the branded-products unit would 
process and resell all transferred materials in the same year, $500 million of 
internal revenues and internal costs could simply be eliminated in the con-
solidation. Since one unit’s revenues are another unit’s costs, overall earnings 
are unaffected.3
But, as is often the case for intercompany sales, ConsumerCo’s branded-
products unit typically does not process and resell all of the private-label deliv-
eries in the same year. Because of the resulting inventory changes of internally 
3 The cumulative value of business units will equal the aggregate value, but the value split depends 
on the level of transfer pricing between the two units. The higher the transfer price, the more aggre-
gate value is transferred to the private-label business. To value each business unit accurately, record 
intercompany transfers at the value that would be transacted with third parties. Otherwise, the relative 
value of the business units will be distorted.

399
EXHIBIT 19.6  ConsumerCo: Eliminations and Consolidation, 2020
$ million
Subsidiary companies
Branded 
products
Private 
label
Devices
Organic 
products
Corporate 
center
Customer 
finance
ConsumerCo 
parent company
Eliminations I
Eliminations II
ConsumerCo 
consolidated
NOPAT
Revenues
2,000
1,500
1,250
750
–
–
–
(500)
–
5,000
Operating costs
(1,500)
(1,358)
(1,094)
(544)
(83)
–
–
498
–
(4,080)
EBITA
500
143
156
206
(83)
–
–
(2)
920
Taxes on EBITA
(175)
(50)
(55)
(72)
29
–
–
–
–
(323)
NOPAT
325
93
102
134
(54)
–
–
(2)
–
597
Income from associates and joint ventures
–
–
–
–
–
–
972
–
(942)
30
Interest income
–
–
–
–
–
77
16
–
–
93
Interest expense
–
–
–
–
–
(58)
(118)
–
–
(177)
Taxes on nonoperating items
–
–
–
–
–
(7)
(304)
–
330
19
Net income
325
93
102
134
(54)
12
565
(2)
(612)
563
Invested capital
Accounts receivable
240
105
25
75
–
–
–
–
–
445
Accounts payable
(216)
(74)
(18)
(5)
–
–
–
–
–
(312)
Inventory
700
375
500
150
–
–
–
(50)
–
1,675
Net PP&E
876
494
55
268
806
–
–
–
–
2,498
Invested capital
1,600
900
563
488
806
–
–
(50)
–
4,306
Excess cash
–
–
–
–
–
–
250
–
–
250
Intercompany receivables
300
–
450
–
–
–
200
–
(950)
–
Loans
–
–
–
–
–
1,154
–
–
–
1,154
Investments in associates and joint ventures
–
–
–
–
–
–
5,097
–
(5,021)
76
Total funds invested
1,900
900
1,013
488
806
1,154
5,547
(50)
(5,971)
5,785
Intercompany payables
–
200
–
–
–
–
750
–
(950)
–
Debt and debt equivalents
–
–
–
–
–
1,038
1,941
–
–
2,980
Adjusted equity
1,900
700
1,013
488
806
115
2,856
(50)
(5,021)
2,806
Total funds invested
1,900
900
1,013
488
806
1,154
5,547
(50)
(5,971)
5,785