Can Cash Reserves be added to a final DCF Value?

Welcome to the forum, AK. Request you to post standalone queries in this thread: Investing Basics - Feel free to ask the most basic questions (It used to be pinned earlier, but now it’s not - so I understand the confusion).

Coming to your question - there are three approaches:

  1. If you’re considering the interest / Dividends / Capital Gains earned from the Cash, you can add it to FCFE and discount it together. Don’t include the Book Value Cash amount. That would lead to Double Counting.

  2. If you think a Cash position doesn’t have the same Risk as the Business (It doesn’t in my opinion), you can ignore the interest / Dividends / Capital Gains earned from the Cash from FCFE and add the Book Value Cash amount to the final Value.

  3. If you agree with #2 above, but think the management is wasting / hoarding / not reinvesting the Cash properly, you can mark it down by some amount just to be safe. Let’s say the Cash is earning 9%, but the Business is earning a 15% RoCE, you can mark it down by 40% (1-0.09/0.15). Of course, this is only if you are convinced that the management will only earn 9% on Cash for a long time and won’t be able to reinvest in the Business at 15% or return the Cash as Dividends/Buybacks.

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