The recommended approach for forecasting cash flows of a parent company arising from investments in subsidiaries where the parent owns less than 20 percent of the subsidiary is to use the relationship between income from these subsidiaries and overall firm revenues.

Question

Quizplus · Accepted Answer

The parent company can record only the dividends received and not the entire cash and revenue derived from the investments. The analyst cannot use traditional drivers for these investments, but instead must estimate future nonoperating income by examining historical growth in nonoperating income or by examining the revenue and profit forecasts of publicly traded companies that are comparable to the equity investment.

The Recommended Approach for Forecasting Cash Flows of a Parent