Question

The expression "conglomerate discount" means: Group of answer choices The ability of a widely diversified firm to exploit economies of scope to reduce its overall costs The willingness of stock exchanges to offer discounted listing fees in order to attract highly diversified firms The stock market tends to value diversified companies at less than their break-up value The lower rates of return that highly diversified companies offer to their shareholders

Answer 1

The stock market tends to value diversified companies at less than their break-up value.

Step-by-step explanation:

Conglomerate discount is only applicable to large, highly diversified business entities and it basically arises as a result of business analysts having difficulty finding an appropriate way to value group of businesses with complex financial statements.

Simply stated, the expression "conglomerate discount" means that the stock market tends to value diversified companies at less than their break-up value.

Hence, when a vast array of businesses aren't performing optimally as the overall conglomerate or there are issues with respect to its core values and financial statements, business analyst may have to apply the conglomerate discount concept.

In order to calculate the conglomerate discount, business experts add up various estimations of the intrinsic values associated with the respective subsidiary firms in a conglomerate and lastly, the market capitalization of the conglomerate is subtracted from that sum. Intrinsic value refers to a measure of the underlying value of a firm and its cash inflow.

Also, it's worthy of note that the sum of the various estimations is typically greater than the conglomerate stock values.