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Unformatted text preview: 141Butler / Multinational FinanceChapter 14 CrossBorder Capital BudgetingChapter 14Chapter 14CrossBorder Capital BudgetingCrossBorder Capital BudgetingLearning objectivesThe algebra of capital budgeting – Domestic and crossborder NPV algebra– An exampleDisequilibria in the international parity conditions– Parent vs project perspectives on valuation– Financing/hedging of foreign projectsSpecial circumstances–Blocked funds, subsidized financing, negativeNPV tiein projects, expropriation risk, tax holidays142Butler / Multinational FinanceChapter 14 CrossBorder Capital Budgeting“Domestic” NPV calculationsVd= Σt E[CFtd] / (1+id)t1. Estimate future cash flows E[CFtd]2. Identify a riskadjusted discount rateDiscount nominal CFs at nominal discount rates and real CFs at real discount ratesDiscount equity CFs at equity discount rates and debt CFs at debt discount ratesDiscount CFs to debt and equity at the WACCDiscount cash flows in a particular currency at a discount rate in that currencyDomestic NPV calculations ✓Crossborder NPV calculationsAn example: Wendy’s in Neverland✓The algebra of crossborder capital budgetingDisequilibria in the international parity conditionsSpecial circumstances143Butler / Multinational FinanceChapter 14 CrossBorder 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 144Butler / Multinational FinanceChapter 14 CrossBorder Capital Budgeting“Domestic” NPV calculationsVd= Σt E[CFtd] / (1+id)t1. Estimate future cash flows E[CFtd]2. Identify a riskadjusted discount rate3. Calculate net present value VdBased on expected future cash flows and the appropriate riskadjusted discount rateDomestic NPV calculations ✓Crossborder NPV calculationsAn example: Wendy’s in Neverland✓The algebra of crossborder capital budgetingDisequilibria in the international parity conditionsSpecial circumstances145Butler / Multinational FinanceChapter 14 CrossBorder Capital BudgetingCrossborder capital budgeting…discounting 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 Vdifat 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 VdidDomestic NPV calculationsCrossborder NPV calculations ✓An example: Wendy’s in Neverland✓The algebra of crossborder capital budgetingDisequilibria in the international parity conditionsSpecial circumstances146Butler / Multinational FinanceChapter 14 CrossBorder Capital Budgeting...
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 Corporate Finance, Interest Rate, Net Present Value, Valuation, crossborder capital budgeting

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