Unformatted text preview: CrossBorder Valuation
FBE 436
Professor Aris Protopapadakis Key Concepts and Skills Cash Flow Valuation WACC method (mention only will not use) APV method (will use only this) Unlevered vs. levered CoE How to estimate CoE and CoD How to treat foreign currency cash flows: Convert fc cash flows to $s and then value Value fc cash flows and then translate to $s
• Or to local currency (lc) Rules and pitfalls
4 Plan of Action Review cash flow derivation Adjusted Present Value method APV
• What cash flows?
• What discount factors?
• How to estimate them? How to apply to foreign currency cash flows
foreign Review slides for WACC are posted, if you think
it’ll help you understand APV better
6 More Information For more details on this material Read the relevant parts of my note:
Valuation of Foreign Origin Cash Flows
• It is posted Read the book 7 How to Value Suppose you have all the financials of the firm
and any other publicly available data Your assignment is to value the company!
WHAT DO YOU NEED TO VALUE
THE COMPANY? 8 How to Value (concl.) Cash Flows
Riskfree rate Risk Premium 9 General Principles
N NPV0 CF0 n 1 CFn TermValN 1 CoCn n 1 CoC N N Universal valuation principle:
Present Value of future expected cash flows
where
simple NPV CFt+n
CoCt+n
N
TermVal
t is the expected cash flow at time = t+n
is the discount rate appropriate for the interval t to t+n
is the number of periods of the project
is the terminal value
date for which valuation is made (like now)
10 General Principles (concl.)
J NPVTotal ,t NPV j ,t
j 1 A firm can be analyzed as a portfolio of individual
projects The firm’s value then is the sum of its J
components:
Questions are: What cash flows? Answer applies to home and foreign currency CFs alike What discount rate(s) There are special issues in crossborder valuation
11 Cash Flows Review Definitions: EBITDA = Sales – CoG EBIT
= Sales – CoG – Depr
•
•
•
•
•
• EBITDA
EBIT
CoG
Depr
Int c Earnings before interest, taxes & depr
Earnings before interest & taxes
Cost of goods sold
Depreciation
Interest payments
Corporate tax rate
12 Cash Flows (cnt.) Cash flow from operations is CFOP = (Sales – CoG – Depr – Int)(1  c)
+ Depr + Int
• You have seen this in 306! A rearrangement reveals the tax shields
representation CFOP = (Sales – CoG)(1 c) + c Depr + c Int The most common and useful way to think about
taxes and tax policies
13 Free Cash Flow Free Cash Flow:
FCF = (Sales – CoG)(1 – c) + c Depr The interest tax shield is omitted –as if no bonds!
• Technical reason; you’ll see why soon Total Free Cash Flow is: TFCF = (Sales – CoG)(1 – c) + c Depr
– CAPEXP – DNWC
• CAPEXP
• DNWC Capital expenditures
Changes in Net Working Capital This takes care of sales done on credit
14 Free Cash Flow (cnt) WARNING: the benefit of tax deductions
c Depr & c Int
are irrelevant unless the corporation pays taxes It is important to check that the corporation that is
doing the evaluation in fact has a tax liability, and
that it can use all the tax deductions implied In the U.S., tax deductions can be carried 2 years back
and 5 years forward For a more accurate valuation, only tax deductions that
can be taken should included, and only when they are
actually taken
15 Profits? Where are “profits”? Nowhere! Accounting profits are irrelevant for valuation Accounting profits are a rulebased construct that
can be manipulated “legally” far more easily than
cash flows I can’t think of a single reason to ever use
“profits” or “net income” for valuation!
16 Example
Sales £ 130.00 CoG £ 80.00 Depr £  6.00 EBIT £ 44.00 Net Interest £ Taxes (25%) £  9.00 Net Income £ 8.00 27.00
17 Example (cnt.) Assume CAPEXP = 10 NWC was 15 last year and 20 this year Using the definitions:
FCF = ? TFCF = ? 18 2nd Example Adams Corp.:
CF Accounting 23 The Method We’ll Use: APV WACC can go very wrong when growth is
introduced We need something better than WACC APV shows the sources of value readily APV is very flexible
• It makes it easy to evaluate alternative and complicated
tax savings schemes and government incentives offers The treatment of longterm D/V is different
24 APV How does APV work? Split up cash flows according to their risk Value them separately using the appropriate riskadjusted cost of funds Add up the parts 25 APV (cnt.) The logic is: Value the cash flow from the business as if it is from an
allequity firm (pretend there is no debt) TFCF = (Sales – CoG)(1 – c) + c Depr
– CAPEXP – DNWC
• Use the allequity firm business risk Value the tax benefits of leverage at their own risk c Int
• Use the risk of debt of the firm If there are other CFs (tax benefits, incentives, etc.), value
them at the appropriate risk Add the pieces together
26 APV (cnt.) Formally the equation for the NPV at date = 0 for a
“project” that starts at date = 1 becomes
N
TFCFn c Intn n
1 CoE u n 1 1 CoDL n
n 1
FC TermValN Tax Shield TermValN 1 CoE u N
N NPV0 CF0 TermValN represent the NPV at date N of CFs starting at
date = N +1
28 APV (cnt.) Why discount both terminal values by CoE(u) rather
than discount the tax shields by CoD(L)?
FC TermValN Tax Shield TermValN
1 CoE u N NOT the standard treatment! Reasons: When tax shields are far out, they are much less certain,
and they take on the risk characteristics of the business risk Avoids overvaluing the tax shields because of the lower
discount rate There are other methods, like multiples
29 APV (cnt.) The general NPV equation has “closedform”
representations under simplifying assumptions:
N NPV0 n 1 CFn 1 rn n 30 APV (cnt.) The NPV of cash flows that grow at a constant rate g
(including 0) for N periods, and can be discounted at
a constant discount factor r is:
• NPV CF0 1 g 1 g 1 r g 1 r N If the cash flows grow in perpetuity, then
• r>g NPV CF0 1 g rg If also g = 0, then
NPV CF0
r
31 APV (cnt.) APV = PV(TFCF ) use CoE(u)
+ PV(cInt) use CoD(L)
+ PV(other stuff) riskappropriate 32 APV Valuation Example (cnt.) To value the CFs of our example: Assume that cash flows don’t grow, i.e., g = 0, Cash flows are perpetual, i.e., n ,
NPV0 24
2 CoE u CoDL It remains to find CoE(u) and CoD(L)
33 What is Terminal Value? If you are using specific cash flow forecasts
for, say, 10 years, the Terminal Value is the
value of the project in year 10 It could be zero if the project is intended to
zero
terminate then It could be the salvage value of the equipment
used It could be the PV of cash flows expected after
year 10
• Generally most appropriate for ongoing enterprises Bond Valuation Example (cnt.) To value a bond: Coupon payments are fixed = coup Cash flows don’t grow, i.e., g = 0,
• coupon payments are fixed Cash flows end at maturity, N, There is final payment (Face Value); this is the Terminal
Value NPV N Coup FV
1 1 CoD L 1 CoD L 1 CoD L N 42 Bond Valuation Example (cnt.) Let NPV CoD(L) = 20%
Maturity = 10 years
Payments = Semiannual
Coupon = 12% 2*10
0.12 2 1 1.00 0.61 0.148644 0.148644 $0.659457 1 0.20 2 1 0.10 1 0.10 20 43 A Quick Review of the CAPM “Asset pricing models” have 2 uses
1. To describe the “determinants” of asset returns
2. To provide forecasts of asset returns, i.e.,
to estimate CoE Returns can be measured, and they are R j ,t Pj ,t Pj ,t 1
Pj ,t 1 Div j ,t
Pj ,t 1
44 CAPM Review (cnt.) The CAPM makes the following two claims:
1. Rj,t Rf j RM ,t Rf j,t or, R j ,t R f j RM ,t R f j,t Where M stands for “market”, and Cov RM , j 0, E j ,t 0, Cov j ,t , j ,t 1 0 RM represents systematic risk represents unsystematic risk
45 CAPM Review (cnt.) 2. E R R E R R
j ,t
f
j
M ,t
f Since this equation gives the “expected
market return”, this is the CoE that must be
used for capital budgeting! This is the levered CoE –CoE(L) 46 CAPM Review Example (cnt.) Let, Rf E(RM) – Rf RM =
=
=
=
= 1.20
2.50%
7.50%
15.00%
12.30% What are Rj,t and CoE(L)? 47 CAPM Review Example (cnt.) R j ,t R f j RM ,t R f j ,t E R j ,t R f j E RM ,t R f Rj,t = CoE(L) = 48 The CAPM (concl.) E R j CoE L R f L E RM R f E R j CoE L R f L E RPM is the CAPM estimate of CoE(L) Rf L E(RM) E(RPM) Riskfree rate
Systematic risk of the equity
Expected market return
Expected market risk premium
E(RPM) = E(RM)  Rf
51 APV (cnt.) A little more review of riskreturn: There are 2 types of systematic equity risk: Business risk Financial risk The relation is: CoEL CoEu 1 c D E CoEu CoDL
53 APV (cnt.)
CoE(u); Cost of unlevered equity
CoE u CoE L 1 c CoD L D
1 1 c D E E 54 APV Example Here is some cost of funds information for our
example: CoD
= 9.00%; this is CoD(L) CoE(L) = 12.40% D/V
= 0.3054 D/E = 0.4397 55 APV Example (cnt.) We need CoE(u) CoE(u):
CoE u CoE L 1 c CoD L D
1 1 c D E E 56 Back to the APV Example By the APV method V 24.00 2.00 229.89
0.1156 0.09 It must be the case that: Rf CoD(L) CoE(u) CoE(L) APV1 CoF Charts 60 Terminal Value –1 For the first several periods (years, quarters) Compute cash flows by period
• Use specific information and forecasts
• Present Value by period For the “out” years specific information is less useful Compute a terminal value & an expected growth rate for
each type of cash flow Use annuity or perpetuity formula (r CoE(u)) V N
TFCF0 1 g 1 g 1 rg 1 r 61 Terminal Value –2
V N
CF0 1 g 1 g 1 r g 1 r Need to make reasonable growth assumptions for
the terminal value. In all cases,
gTFCF < CoE(u).
CoE Furthermore, gTFCF must be consistent with
economywide growth
economy Same thing is true for the growth rate of the tax
shields if you assume a different rate from gTFCF
62 The Cost of Funds Where do CoD and CoE come from? CoD
• CoD is firmspecific, not projectspecific
• If the firm already has outstanding debt, it is the bond’s
current yield NOT the coupon rate Assuming no big expected changes in leverage There is no significant probability of default There is no convertibility option • CoD is wellapproximated by the firm’s current or
expected debt rating under the above conditions
• What if leverage is expected to change?
63 A Cost of Debt Issue
When is yield a good estimate of the CoD? The yieldtomaturity is the IRR of the bond, assuming
the coupon payments are made Yields of Treasuries are readily available; not so for
corporate bonds and other risky fixed income obligations If there is a significant default probability, then the expected
CFs < the promised CFs
• This leads to a too high an IRR and a CoD If the bond is convertible,
then the expected CFs > the promised CFs
• This leads to a too low an IRR and CoD
64 The Cost of Funds (cnt.) CoE; we’ll get it from the CAPM, WAPM or
IAPM
• CoE is projectspecific, it is NOT firmspecific
• The current CoE of the firm is not relevant, unless the
project has the same risk characteristics as the overall
firm This is not very likely! Betas of divisions within a single firm can vary widely • The CoE calculated from these models is good only for
the current expected leverage of the firm All the XAPMs give CoE(L) at the firm’s current expected
leverage
79 The WAPM & IAPM WAPM & IAPM are the international versions of
the CAPM. Two commonly used versions:
1. WAPM: just like the CAPM but uses a World Market
Index CoE L R f W , L E RW R f Procedure and interpretation is identical to the CAPM
W,L is the equity’s beta with the World Market Index 80 The IAPM
2. Uses 2 indices (possibly more):
i. The World Market Index ii. The Country Index iii. Maybe an FX risk factor E(RW)
E(RM) CoE L R f W , L E RW R f M , L E RM R f There are 2 betas, i.e., 2 sources of risk Procedure and interpretation is similar to the
CAPM
•
• W,L is the equity’s beta with the world market index
M,L is the equity’s beta with its country index
81 CoE L R f The IAPM E R R E R
W ,L W f M ,L M Rf Important All returns must be converted into a single
currency before estimating betas or expected
returns. Betas estimated from one model cannot be used
to compute CoE from another model 82 The XAPMs and Others There are several other asset pricing models: ICAPM
• Intertemporal Cap Asset Pricing Model MFAPM
• Multifactor Asset Pricing Model CCAPM
• Consumption Cap Asset Pricing Model APT
• Arbitrage Pricing Theory
83 IAPM Example Let (all $ returns): E(RW)
E(RM)
Rf = 12.00%
= 18.00%
= 3.00%
= 1.20
= 0.75 W,L
M,L What is the CoE(L) according to the IAPM? 84 IAPM Example (concl.) What is the CAPM CoE(L) in this case? 86 What Rf to Use? Conflicting statements about which riskfree rate to
use when estimating CoE ALWAYS The rate with the same maturity that was used to estimate
beta
• It is the only thing that makes sense This is not a matter of preference! • Usually beta is estimated with monthly data 1month or maybe 3month TBill yield Sometimes it is not advisable to use the current interest
rate
89 What Rf to Use? (concl.) Rf is the shortterm rate and it is supposed to be riskfree:
Rf = real rate + E(Inflation)
All longer term rates also include term risk premia If the current Rf seems particularly unrepresentative,
then it is best to adjust it rather than use the wrong
wrong
rate
90 CoE(u) Again (cnt.) Suppose this firm is planning to purchase
another company in a different line of business What CoD and CoE should it use to value the
target company? 91 Principles To Live By Use the APV method Enumerate the “near” cash flows For the long term, use reasonable growth
assumption; terminal value Use the constantgrowth formula
• Indefinite time
• Fixed time period Insure that the implied D/V is consistent
92 A MultiPeriod Example We have seen how APV is used We have everything we need to value home
currency cash flows
APV2 How to apply to foreign currency cash flows?
93 ForeignCurrency Cash Flows Should local currency cash flows be converted to $US as they occur and then valued in $US?
discounted and then translated to $US at the current exchange rate? What Cost of Funds should be used in each case? How to deal with FX risk, political risk, or other special risks
associated with foreign operations? Should cash flows be discounted at the time they are earned
or when they are remitted to the parent? Should foreign or domestic taxes be used?
Read the book chapter 102 ForeignCurrency CFs (cnt.) The CoC must be consistent with the currency of
denomination of the cash flows! If CFs are converted to $ before discounting then the CoC
must be estimated for US$
If CFs are in fc (lc) then CoC must be estimated for the fc
country currency 103 Foreign Currency CFs There are two basic approaches In principle, they ought to give the same value That is quite rare
• It is a sampling issue + inconsistencies in the data 1. Translate foreign CFs to $s and value Requires FX forecasting and $based CoCs 2. Value foreign CFs in the local currency and
translate PV into $s Requires foreign currency CoCs
104 Translate Into $s and Value
One approach: Compute the cash flows in local (foreign)
currency Convert each cash flow (including the
terminal value) to $s at the expected FX rate Value the $ CFs using APV and $based CoC 105 Translate Into $s and Value (cnt) Main Advantage: We know a lot about how to find $based Cost of
Funds Main Disadvantage: We have to forecast FX rates far into the future We already know that this is a tricky and
inaccurate business! 106 Forecasting the FX Rate Forecasting FX accurately rates is difficult. Here is
a hierarchical preference for which forecast to use Shortterm:
1. Internal or professional forecast
2. UIRP (same as the synthetic forward rate) Longterm:
1. UIRP as far as there are yield data for both countries
2. Relative PPP 107 Forecasting the FX Rate (cnt) How to forecast FX rates? Unless there is a better forecast, for near and mediumterm use UIRP 1 i$, N
E S t N S t 1 i
lc , N N where, N is the number of periods and maturity the interest rates i are per period and for the
corresponding maturitry
• This is just the implied forward rate
implied
108 Forecasting the FX Rate (cnt) How to forecast FX rates? Unless there is a better forecast, for near and mediumterm use UIRP 1 i$, N
E S t N S t 1 i
lc , N N where, N is the number of periods and maturity. Actually the
correct way to do it would be
1 i$, N N
360
E S t N S t
1 ilc , N N
360 109 Forecasting the FX Rate (concl) For longterm FX forecasts, use PPP
N 1 E ,$ E S t N S t 1 1 E ,lc Use “dynamic” forecasting The next forecast (j+1 periods ahead) is based on
the previous one (j periods ahead)
E St 1 E S 1 E g s , 110 FX Forecasting Example 3year cash flows in Pesos to be valued
Interest Year US ARG Inflation ARG 3.20% 0 US 9.80% 1 3.00% 13.80% 3.50% 11.00% 2 3.75% 15.50% 3.25% 12.00% 3 4.10% n.a. 2.75% 10.00%
111 FX Forecasting Example (cnt.) For year 1 we can use UIRP to get (S0 = 0.3289) If we were to use PPP we would get 112 FX Forecasting Example (cnt.) For year 2 we can still use UIRP For year 2 For year 3 we only have PPP available For year 3 115 Estimating CoE What to use for CoE? The local CAPM CoE j L R f j E RPM The WAPM or the IAPM
CoE j L R f j ,W E RP , or
W CoE j L R f j ,W E RP j ,US E RP W
US • The U.S. index because the CFs are translated into $s U.S. investor point of view Could add the local index as well as a 3rd factor
119 Estimating CoD Use the firm’s U.S. CoD Recall the caveats though 120 CoE Example Relevant cost of funds information IAPM E(RPM,US)
E(RPM,W)
Rf US
W =
=
=
=
= 7.00%
6.30%
4.00%
0.85
0.38 121 Value in FC, Then Translate
A second approach Compute the PV in fc and then translate to $s
PV($)t = St *PV(fc)t If you have good data it is the better
approach 124 Value in FC & Translate Into (cnt) Main Advantage: Seems to eliminate the need to forecast FX rates Main Disadvantage: Have to come up with foreign currencybased fc
Cost of Funds 125 CoE In Foreign Currency It is important to compute the IAPM or the WAPM for
the fc if at all possible
• Compute the beta(s) using country returns and the world index CoE j L R f j ,Country E RPCountry j ,W E RP W Issues: Local market efficiency
Length of available data
Quality of available data
Local market risk premium
126 Cost of Funds In FC (cnt.) If calculating local CoE is infeasible, then
CoE can be estimated in other ways
1. Use UIRP to convert U.S. cost of funds to fc
terms 1 CoE fc 1 CoE$ 1 i fc
1 i$ • Maturity
• Implicit assumption about market integration
127 Cost of Funds In FC (cnt.) Using CIRP or the Forward rate to convert
U.S. cost of funds to fc terms means Assuming that the fc CoC is the fcequivalent of
the U.S. CoC 1 CoE fc 1 CoE$ 1 i fc
S 1 CoE$ F
1 i$ It is the same thing
128 Cost of Funds In FC (concl.) What does the IRP adjustment really do? The $ riskfree rate is converted to the fc riskfree rate There is a small adjustment to the $ risk premium The project beta doesn’t change 1 i fc 1 R f ,$ j RM ,$ R f ,$ 1 i $ 1 i fc 1 i fc 1 CoE fc 1 R f ,$ 1 i j RW ,$ R f ,$ 1 i R f ,$ i$ , R f , fc i fc
$
$ 1 i fc 1 CoE fc 1 R f , fc j RW ,$ R f ,$ 1 i $ 1 CoE fc 1 CoE$ 1 i fc
1 i$ 129 Example You estimate CoE$ = 16.0%, and data are
insufficient to calculate the CoEfc 3 month TBill = 2.2% Equivalent shortterm fc rate = 5.5% What is your estimate of CoEfc?
1 CoE fc 1 CoE$ 1 i fc
1 i$
130 Cost of Funds In FC (concl.) If the CoD(L) is not available in foreign
currency you can use the same UIRP
adjustment to estimate it 1 i fc
1 CoD fc L CoD$ L 1
1 i$ 136 Cost of Funds In FC (cnt.)
2. Some analysts suggest to calculate beta as
Project,Local = Project,US *Foreign Country
where
Std FCountry FCountry Corr FCountry ,U .S .
Std U .S . The lower the correlation between the
country and the U.S. the lower the project
beta estimate Makes sense when markets are unlikely to be
integrated with the world markets
137 Example Corr($,MXP)
Stdev($)
Stdev(MXP)
US Project Beta = 0.35
= 0.25
= 0.44
= 2.55 What is your estimate of the MXP project
beta? FCountry Corr FCountry ,U .S . Std FCountry Std U .S . 138 Cost of Funds In FC (concl.) This approach is best suited to emerging markets
• Short time series
• Few companies Company returns seem to be driven largely by
country returns Emerging markets have low correlation with the
U.S. or the World portfolio
Intnl Val 2 140 Country Risk “Country” risk or its subset, expropriation
risk, is important or even critical in many
circumstances It is the risk that a country will Expropriate part or all the assets Impose additional restrictions on repatriation of
earnings Come up with any type additional regulations that
will reduce the value of the investment Country Risk (cnt.)
How to Account for Country Risk?
1. Add a risk premium to CoE
• What amount? 2. Use the “premium” a country pays on its
sovereign debt over the equivalent U.S. rate
as its country risk premium
•
•
• Country must have $ bonds outstanding
This approach is flatout wrong because this yield
includes the probability of default of the bonds
Yields are calculated on face not expected value! Example Suppose the default risk is 10% per year for every year, and
Coupon = 10%, the CoD = 8% (U.S. COD = 6%), maturity
is N = 20
The fc bond value can be found directly from the annuity
formula with growth
N
NPV CF0 1 g 1 g 1 r g 1 r Now replace CF0 with the coupon payment and g with
–default probability
NPV N
Coup 1 p 1 p 0.7870
1 r p 1 r Example
If you were to compute the yield to maturity of
those bonds, you’d get
Yield 18.14% And a risk premium of 10.14%! Much larger than the market RP!
But it is totally bogus Country Risk (cnt) These “calculated premia tend to be Very large compared to the market risk premium
~ (6%  8%)
Default “risk” may have a systematic risk
component but it has to be low Country risk in not a good candidate for
inclusion in CoE! Country Risk (cnt.)
How to Account for Country Risk?
3. Do fundamental analysis
• Try to assess country risk with empirical data • Use political as well as economic expertise to assess
the risk by analogy to past events These methods have not proven very accurate Country Risk (concl.)
The Correct Approach:
1. Adjust the cash flows for the probability of
expropriation
2. Use scenario analysis
•
•
•
• This makes most sense
Specify what might happen
Assign (subjective) probabilities
Compute the PVs of the scenarios • Add the PVs at the end Make sure probabilities add to 1.0 151 Piecewise Valuation An example of piecewise valuation using the
annuity with growth relation
N
CF0 1 g 1 g NPV 1 r g 1 r • Piecewise valuation
152 Some Practical Rules There are two sources for the material that
follows: My posted notes
• “Valuation of Foreign Origin Cash Flows” The assigned textbook chapter My notes deal with more issues The book gives more depth 153 Some Practical Rules (cnt.)
Dealing with the long term Nuanced forecasts do not extend far into the
future After a few years all that is left is trend At that point, determine the “Terminal Value” Present Value TermVal to today
• Perpetuate last value?
• What growth rate?
154 Terminal Value (TV)
Dealing with the long term
N NPV0 CF0 1 CoC CFn n n 1 TermVal N n TermVal N 1 CoC N N K
CFN 1 g 1 g 1 r g 1 r • N is the number of periods explicitly enumerated
• K is the number of additional periods assumed
K 155 Terminal Value Issues: How big is the Terminal Value PV? How is it split between operations and
tax shields? What growth rate can the tax shields be assigned?
• What does it imply about the D/E ratio of the firm? Real or $ cash flows?
• What growth rate keeps the share of GDP constant Others?
156 Terminal Value If gCF are close to CoE(u) the cash flow TV
explodes Since we use CoE(u) rather than CoD to discount
the terminal value of the tax shields
• You can safely assume that gInt = gCF
• Just means that the firm is assumed to maintain its
current D/E ratio indefinitely Need to check to see if this is possible by computing proforma Balance Sheets 157 Terminal Value gCF > than
problematic the economy’s growth is The growth rate of existing businesses has to
comform to the GDP growth rate in the long run
• It means that the market share is stabilized at some
level (cold be a very high level) Might want to have a medium growth period
followed by a “normal growth” period 158 Terminal Value Example The spreadsheet Term Value contains 5 years
worth of TFCFs What Terminal Values would you choose and
why? The spreadsheet helps you gauge
consequences of various assumptions the Term Value 159 Terminal Value Issues Suggestions: We know a lot about real growth rates, greal We need to estimate expected inflation, gterm = (1+ greal)(1+) – 1 greal + Alpha Industries An application of foreign cash flow valuation
techniques 2 valuation methods: Translate & value in $s
• Forecast FX rates Value in fc & translate
• Find fc cost of funds
• How to estimate CoE & CoD in fc
• How to estimate the beta of fc cash flows (to use for
valuing in fc)
169 Some Practical Rules (cnt.)
On Discount Rates You are less likely to make grievous errors if
you use real rather than nominal discount
rates Formally they are equivalent Discount real cash flows with real discount rates Discount nominal cash flows with nominal
discount rates
Inflation Adj 172 Some Practical Rules (concl.)
Evaluating Cash Flows Marginal analysis or incremental cash flows The proper base case
Cannibalization
Sales creation
Opportunity cost
Transfer pricing
Fees and royalties
What tax rate?
173 Big Risks in Global Management
Global Edge
Using the Opacity Index to manage the risks of
crossborder business According to Joel Kurtzman, a former Harvard Business
Joel
Review editorinchief and the founder of Strategy &
Business, and Glenn Yago, Director of Capital Studies at
Glenn
the Milken Institute, the problems begin when companies
and investors pay attention to the wrong risks. As a result,
businesses are left exposed to the risk of suffering large
losses. In Global Edge, the authors offer two breakthrough
tools to better manage the hidden perils of going global Big Risks in Global Management
Global Edge 1. The CLEAR framework describes how to recognize and
manage the expensive challenges businesses face overseas:
Corruption, the Legal system, Enforcement policy,
Accounting standards and governance, and Regulation 2. The Opacity Index is an updated database of countries
ranked in order of their standing with respect to the
CLEAR factors, allowing companies to balance their risk
exposure Takeaways APV is the preferred valuation method FC cash flows can be Converted individually to $s and then valued Valued in fc and then translated to $s Applying the appropriate (W)CAPM or IAPM to $ or fc
cash flows is the preferred method for estimating the
CoE There are other methods if the (W)CAPM or IAPM are
infeasible Country risk, terminal value assignment, real v.s.
nominal CFs, proper accounting of the implications of a
new project are very important
176 The End ...
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 PROTOPAPADAKIS
 Capital Asset Pricing Model, Interest, Net Present Value, APV

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