Exchange 23 multinational capital budgeting whatever

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Unformatted text preview: tion of profit, the result is that the parent corporation cannot use cash flows blocked in the foreign country to pay dividends to its shareholders or to invest elsewhere in the business. business. In addition to the complexities of the cash flow analysis, the In cost of capital may be different for a foreign project than for an equivalent domestic project, because foreign projects may be more or less risky. A higher risk could arise from two primary sources—(1) higher exchange rate risk and (2) political risk. A lower risk might result from international diversification. Exchange rate risk relates to the value of the basic cash flows in Exchange the parent company’s home currency. the 24 Multinational Capital Budgeting However the two risks can often hedge each other. Suppose However an investor in the US buys shares in a British company. There will be a risk that the value of the investment in dollar terms may decline if the pound falls against the dollar. terms However if the pound depreciates, the share price is likely However to rise as the value in pounds of its dollar denominated sales rises. rises. The end result is that the two types of exchange rate risk The neatly hedge each other. neatly Political risk refers to potential actions by a host government that Political would reduce the value of a company’s investment. would 25 Multinational Capital Budgeting It includes at one extreme the expropriation (the official seizure It by a government of private property) without compensation of the subsidiary’s assets, but it also includes less drastic actions that reduce the value of but the parent firm’s investment in the foreign subsidiary, including higher taxes, tighter repatriation or currency controls, and restrictions on prices charged. The risk of expropriation is small in traditionally friendly and The stable countries such as Great Britain or Switzerland. stable However, in Latin America, Africa, the Far East, and Eastern However, Europe, the risk may be substantial. Past expr...
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This note was uploaded on 02/11/2014 for the course MANA 2028 taught by Professor Sisterennis during the Winter '12 term at Marquette.

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