###### Calibrating a Binomial Interest Rate T ...

The following steps should be followed when calibrating binomial interest rate trees to... **Read More**

The sum-of-parts valuation model values a company by aggregating the estimated value of its different segments valued as if they were independent. The value estimated from this approach is called the breakup value or private market value.

This approach is appropriate for companies with different unrelated segments. It is also used to estimate the value that can be unlocked from a restructuring like a spin-off, split-off, or equity carve-off.

A * conglomerate discount* may be applied to the sum-of-parts valuation. Explanations for the conglomerate discount include:

This inefficient capital allocation does not maximize shareholder value.**Inefficiency in the allocation of investment capital among divisions:**Poorly performing companies will expand by making acquisitions in unrelated industries.**Endogenous factors:**According to some, conglomerate discounts do not exist as they are a result of a flawed measurement.**Research measurement errors:**

A breakup value above a company’s going concern value may prompt a divesture or a spin-off.

## Question

Which of the following is the

most likelyreason for applying a conglomerate discount to a valuation?

- Inefficiency in the allocation of investment capital.
- Sum-of-parts valuation.
- Breakup value.
## Solution

The correct answer is A.The inefficiency in the allocation of investment capital is one of the reasons a conglomerate discount would be applied to an estimated valuation.

B is incorrect.Sum-of-parts valuation values a company by aggregating the estimated value of its different segments valued as if they are independent.

C is incorrect.Break-up value is the value estimated from the sum-of-parts valuation model.

Reading 22: Equity Valuation: Applications and Processes

*LOS 22 (g) D**escribe sum-of-the-parts valuation and conglomerate discounts.*