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**Unformatted text preview: **14-1Butler / Multinational FinanceChapter 14 Cross-Border Capital BudgetingChapter 14Chapter 14Cross-Border Capital BudgetingCross-Border Capital BudgetingLearning objectivesThe algebra of capital budgeting Domestic and cross-border NPV algebra An exampleDisequilibria in the international parity conditions Parent vs project perspectives on valuation Financing/hedging of foreign projectsSpecial circumstancesBlocked funds, subsidized financing, negative-NPV tie-in projects, expropriation risk, tax holidays14-2Butler / Multinational FinanceChapter 14 Cross-Border Capital BudgetingDomestic NPV calculationsVd= t E[CFtd] / (1+id)t1. Estimate future cash flows E[CFtd]2. Identify a risk-adjusted discount rate-Discount nominal CFs at nominal discount rates and real CFs at real discount rates-Discount equity CFs at equity discount rates and debt CFs at debt discount rates-Discount CFs to debt and equity at the WACC-Discount cash flows in a particular currency at a discount rate in that currencyDomestic NPV calculations Cross-border NPV calculationsAn example: Wendys in NeverlandThe algebra of cross-border capital budgetingDisequilibria in the international parity conditionsSpecial circumstances14-3Butler / Multinational FinanceChapter 14 Cross-Border Capital BudgetingThe WACC equation is the cost of each capital component multiplied by its proportional weight and then summing: Where: Re = cost of equity Rd = cost of debt E = market value of the firm's equity D = market value of the firm's debt V = E + D E/V = percentage of financing that is equity D/V = percentage of financing that is debt Tc = corporate tax rate 14-4Butler / Multinational FinanceChapter 14 Cross-Border Capital BudgetingDomestic NPV calculationsVd= t E[CFtd] / (1+id)t1. Estimate future cash flows E[CFtd]2. Identify a risk-adjusted discount rate3. Calculate net present value Vd-Based on expected future cash flows and the appropriate risk-adjusted discount rateDomestic NPV calculations Cross-border NPV calculationsAn example: Wendys in NeverlandThe algebra of cross-border capital budgetingDisequilibria in the international parity conditionsSpecial circumstances14-5Butler / Multinational FinanceChapter 14 Cross-Border Capital BudgetingCross-border capital budgetingdiscounting foreign currency cash flows Recipe 1: Discount in the foreign currencyDiscount in the foreign currency at ifand convert the foreign currency NPV to a domestic currency value Vd|ifat the spot exchange rate Sd/fRecipe 2: Discount in the domestic currencyConvert foreign cash flows into the domestic currency at expected future spot rates and then discount at the domestic rate idto find Vd|idDomestic NPV calculationsCross-border NPV calculations An example: Wendys in NeverlandThe algebra of cross-border capital budgetingDisequilibria in the international parity conditionsSpecial circumstances14-6Butler / Multinational FinanceChapter 14 Cross-Border Capital Budgeting...

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