340  Moving from Enterprise Value to Value per Share equity stake, multiply the enterprise value for Coca-Cola Amatil (AU $5,930 million) by Coca-Cola’s ownership percentage (30.8 percent). The resulting ownership stake equals AU  $1,826 million. Since Coca-Cola reports in U.S. dollars, the stake must be converted into U.S. dollars at the prevailing ex- change rate. Multiplying AU $1,826 million by 0.73 equals the value of Coca- Cola’s ownership of Coca-Cola Amatil ($1,325 million). Although this valuation was accurate as of December 31, 2018, any change in one of the inputs will require an update to the valuation. For instance, dur- ing the first quarter of 2019, Amatil’s stock price rose by approximately 3 per- cent. This rise in value was reflected in Coca-Cola’s next quarterly report but not during the interim. Investments in Privately Held Companies  If the subsidiary is not listed but you have access to its financial statements (for instance, through a public bond offering or private disclosure), perform a separate DCF valuation of the equity stake. Discount the cash flows at the appropriate cost of capital (which may be different than the parent company’s weighted average cost of capital). Also, when completing the parent valuation, include only the value of the parent’s equity stake and not the subsidiary’s entire enterprise value or equity value. If the parent company’s accounts are the only source of financial informa- tion for the subsidiary, we suggest the following alternatives to DCF: • Simplified cash-flow-to-equity valuation. This is a feasible approach when the parent has a 20 to 50 percent equity stake, because the subsidiary’s net income and book equity are disclosed in the parent’s accounts.6 EXHIBIT 16.2  Coca-Cola Company: Publicly Traded Equity Investments, December 2018 $ million Book value Fair value Valuation of Coca-Cola Amatil Limited (ASX: CCL) Monster Beverage Corporation 3,573 5,026 Share price, AU $ 8.19 Coca-Cola European Partners plc 3,551 4,033 × Shares outstanding, million 724 Coca-Cola FEMSA, S.A.B. de C.V. 1,714 3,401 = Market capitalization, AU $ million 5,930 Coca-Cola HBC AG 1,260 2,681 Coca-Cola Amatil Limited 656 1,325 × Percent ownership 30.8% Coca-Cola Bottlers Japan Holdings Inc. 1,142 978 = Ownership stake, AU $ million 1,826 Embotelladora Andina S.A. 263 497 Coca-Cola Consolidated, Inc. 138 440 × Currency conversion, US $/AU $ 0.73 Coca-Cola İçecek A.Ş. 174 299 = Ownership stake 1,325 Total 12,471 18,680 Source: Coca-Cola Company annual report, 2018; Coca-Cola Amatil annual report, 2018; Yahoo Finance. 6 The book value of the subsidiary equals the historical acquisition cost plus retained profits, which is a reasonable approximation of book equity. If goodwill is included in the book value of the subsidiary, this should be deducted. Valuing Nonoperating Assets  341 Build forecasts for how the equity-based key value drivers (net income growth and return on equity) will develop, so you can project cash flows to equity. Discount these cash flows at the cost of equity for the subsidiary in question and not at the parent company’s cost of capital. • Multiples valuation. As a second alternative, estimate the partial stake using a price-to-earnings and/or market-to-book multiple. If the com- pany owns 20 to 50 percent of the subsidiary, apply an appropriate mul- tiple to reported income. • Tracking portfolio. For parent equity stakes below 20 percent, you may have no information beyond the investment’s original cost—that is, the book value shown in the parent’s balance sheet and often only disclosed in the notes. Even applying a multiple is difficult, because neither net income nor the current book value of equity is reported. If you know when the stake was acquired (or last valued), you can approximate its current market value by applying the relative price change for a portfo- lio of comparable stocks over the same holding period. You should triangulate your results as much as possible, given the lack of precision for these valuation approaches. Loans to Other Companies For loans to nonconsolidated subsidiaries and other companies, use the re- ported book value. This is a reasonable approximation of market value if the loans were given at fair market terms and if the borrower’s credit risk and general interest rates have not changed significantly since issuance. If this is not the case and the investment is substantial, you should perform a separate DCF valuation of the promised interest and principal payments at the yield to maturity for corporate bonds with similar risk and maturity. Finance Subsidiaries To make their products more accessible, some companies operate customer fi- nancing businesses.7 Because financial subsidiaries differ greatly from manu- facturing and services businesses, it is critical to separate revenues, expenses, and balance sheet accounts associated with the subsidiary from core opera- tions. Failing to do so will distort return on invested capital, free cash flow, and ultimately your perspective on the company’s valuation. Once the finance subsidiary is separated from operations, use the reor- ganized financial statements to value the subsidiary as if it were a financial 7 Companies that sell expensive products typically offer financing of purchases. Significant customer financing subsidiaries exist at IBM and Textron, among others.