Cross Border Valuation Issue

Topics: Inflation, Foreign exchange market, Exchange rate Pages: 27 (9659 words) Published: November 30, 2011

Ninfa Borth Altadonna Jeff Fosler Susan Hua Shawn Kennedy Brian Limurti Alex Santibanez

Valuation and Corporate Combinations
Finance 668.25
Sat., Dec. 4, 2010

I. Executive Summary3
II. Summary of Key Terms & Concepts3
III. Discuss various Valuation Implications and Applicability to MNC’s & global capital markets13
IV. Discuss DCF Methods (Multiple analyses in US or Foreign comparables)18
V. Discuss a Short Example23
VI. Real World Company Case Study 1:25
VII. Real World Company Case Study 2:27
VIII. Conclusion28

I. Executive Summary

There are many important facets to assessing cross-border valuation issues in the context of mergers and acquisitions. It is important that the investor gain a strong understanding of a companies’ culture, its management and its employees. Additionally, there are nuances involved in managing assets, capabilities, and operational plans as well as in information reporting and sharing. These are issues that are prevalent in evaluating any business, but particularly for any organization engaged in extensive operations or investments across national borders or located in foreign environments. To help us gain a better understanding of the complexities involved in creating a successful global firm topical areas such as Political Risk, Foreign Currency and Accounting Principles to among others, this paper will discuss areas that apply to multinational corporations and the global capital market, including important and. We will examine how companies can craft an attractive cross border investment strategy by taking into consideration the particular areas that are unique to the global business arena. Additionally, we will compare differences between domestic and foreign Discounted Cash Flow (DCF), which will be reviewed with a further understanding on variables that can bring further valuation issues to the forefront when engaging in the constant and evolving challenges in the global markets. We will conclude with real life illustrations, examining two cases studies: one involving political risk valuation for a Brazilian Corporation and the other case involving the valuation of businesses between a U.S. and U.K. company. II. Summary of Key Terms & Concepts

Interest Rate Parity (IRP) is an important equilibrium position of globalized financial markets. It requires that national and international interest rates for the same types of loans in the same currency be equal. Otherwise, arbitragers will simultaneously borrow in one market and lend in another, making tremendous profits. These profits are often much greater than could be attained from merchandise and services trade. Purchase Power Parity (PPP) describes the relationship between currency exchange rate and price levels in two countries. The exchange rate in two countries is positively related to the price level in foreign country and negatively related to price level in home country. “Spot” Exchange Rate is the rate prevailing for purchases or a sale affected at the time the rate is quoted. “Forward” Rate is the exchange rate in which a contract can be signed at the same time to buy or sell foreign exchange in the future (hence, forward rate). Arbitrage is the simultaneous purchase and sale of the same, or essentially similar, security in two different markets for advantageously different prices. Fisher Equation is simply the nominal rate of interest = real rate of interest + inflation. HOW BORDERS AFFECT M&A VALUATION

Inflation is a rise in most prices – a rise in the average price level of the economy. Country Comparison: Inflation rate (consumer prices) *
*This entry furnishes the annual percent change in consumer prices compared with the previous year's consumer prices....
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