The market value of a minority interest can be derived by applying the % consolidated but not owned by a total subsidiary TEV. Since the minority’s proportion of income is included in EBIT and free cash flow, the amount ‘owed’ to another owner must be subtracted from the DCFs Total Enterprise Value (TEV) to arrive at ‘clean’ enterprise value and then a ‘clean’ equity value.
Minority interests are pieces of a business that are consolidated but not fully owned by the consolidating entity. Only in these situations, estimating the fair value of debt and related derivatives to get a better proxy for the bondholders to claim than simply using book value is recommended. Another example would be in cases where the credit ratings of the companies involved change quite dramatically. when companies have issued fixed-rate debt and interest rates either move up or down quite significantly. Therefore use of book value in the majority of cases especially the difference between book value and market value of debt is only going to be material in a few cases e.g. So although conceptually including debt at fair value is the superior approach, this information is not always easily available. Although the market value of outstanding bonds can be monitored, this is nearly impossible for the related derivatives. Lacking more frequent disclosure of the fair value of debt means analysts and investors need to estimate the market value of debt.
When performing a DCF analysis, it is important to properly reflect the values associated with partially-owned investments. The above list is not exhaustive and other potential adjustments relevant to specific situations should be discussed with team members.
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