338  Moving from Enterprise Value to Value per Share This section identifies the most common nonoperating assets and describes how to handle each of them in the valuation. Excess Cash and Marketable Securities As discussed in Chapter 11, companies often hold more cash and marketable securities than they need to run the business. Companies hold excess cash for a number of reasons, parking it in short-term securities until they can invest it or return it to shareholders. Prior to the change in American tax laws in 2018, American companies held significant amounts of excess cash when they had substantial earnings outside the United States. They were reluctant to repatri- ate cash because they were required to pay any difference in taxes upon repa- triation. With a drop in the corporate tax rate from 35 percent to 21 percent, many companies have committed to repatriating cash. How they deploy this cash will unfold over time, but it will probably consist of new investment, increased dividends, and significant share repurchases.4 You should make an estimate of how much the business needs for opera- tions. The remaining cash and marketable securities are treated as nonoper- ating. As a rule of thumb, we often assume that a company requires about 2 percent of revenues in cash to operate the business. The remaining cash and marketable securities are considered excess. Cash and marketable securities are reported on a company’s balance sheet at fair market value. You can use these assets’ book value in your valuation, unless you have reason to believe they have significantly changed in value since the reporting date (as in the limited case of volatile equity holdings). Investments in Nonconsolidated Companies Companies often invest in other companies without taking control, and hence they do not consolidate the investment’s financial statements into their own. Investments in nonconsolidated companies can be found on the bal- ance sheet under many names. For instance, Philips reports its investments in nonconsolidated companies as investments in associates, Intel reports them as equity investments, and PPG Industries reports them as investment in equity affiliates. Because the parent company does not have control over these subsidiar- ies, their financials are not consolidated, so these investments must be val- ued separately from operations. Under U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), 4 For examples of repatriation and redeployment, see A. Balakrishnan, “Apple Announces Plans to Repatriate Billions in Overseas Cash, Says It Will Contribute $350 Billion to the US Economy over the Next 5 Years,” CNBC, January 17, 2018, www.cnbc.com. For more on share buybacks, see K. Rooney, “Share Buybacks Soar to Record $806 Billion—Bigger Than a Facebook or Exxon Mobil,” CNBC, March 25, 2019, www.cnbc.com. Valuing Nonoperating Assets  339 there are two ways in which nonconsolidated subsidiaries can appear in the parent company’s accounts: 1. For equity stakes in which the parent company exerts “significant influ- ence” but lacks control (often between 20 and 50 percent ownership), the equity holding in the subsidiary is reported on the parent’s balance sheet at the investment’s historical cost plus any reinvested income. The parent company’s portion of the subsidiary’s profits is shown on the parent’s income statement as other income, unless specifically dis- closed. Accountants refer to this as the equity method. 2. For equity stakes below 20 percent, the parent company is often assumed to have no influence. The equity holdings are shown at historical cost on the parent’s balance sheet. The parent’s portion of the subsidiary’s dividends is included in other income on the income statement. In response to the accounting and financial scandals of the early 2000s, global accounting moved away from absolute thresholds to consolidation methods that rely on the parent’s influence around key activities and exposure to gains and losses. Implementation has been complex, and companies can report under multiple standards. Always investigate the notes to determine which investments contribute to EBITA and which do not. Investments in Publicly Traded Companies  If an investment in another company is publicly listed, use the market value to determine the value of the parent company’s equity stake. Verify that the market value is indeed a good indicator of intrinsic value. In some cases, these listed subsidiaries have very limited free float and/or very low liquidity, so the share price may not properly reflect current information. Exhibit 16.2 presents the equity investments held by Coca-Cola. Since Coca-Cola does not control these companies, their revenue, income, and as- sets are not consolidated on Coca-Cola’s financial statements. Therefore, each investment must be valued separately and added to Coca-Cola’s value of operations to determine enterprise value. In the management discussion and analysis section of its 2018 annual re- port, Coca-Cola reports both book value and fair value for its equity invest- ments.5 Therefore, if you are valuing Coca-Cola near its fiscal-year close, the valuation from the annual report will suffice. As the year progresses, however, these data become stale, and each investment must be revalued. For example, consider Coca-Cola Amatil, Coca-Cola’s bottler in Australia. To value this 5 Companies will disclose how fair value is determined for each security, using a system of levels. Level 1 inputs are quoted prices of identical securities in liquid markets. Level 2 inputs are quoted prices of identical securities in illiquid markets or similar securities in liquid markets. Level 3 inputs are not observed and are estimated using financial models.