EECS 1019 Lecture Notes - Lecture 28: Cash Flow, Weighted Arithmetic Mean
15 Jun 2018
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EECS 1019 Lecture 28 Notes
Introduction
Cash flow
• Discount the estimated total dollar cash flow for each period at the weighted cost of
capital (k) and then sum these discounted cash flows to estimate the value of this MNC.
• The process for valuing an MNC receiving multiple currencies over multiple periods can
be expressed formally as: V ¼ Xn t¼1 Xm j¼1 ½EðCFj,tÞ EðSj,t Þð1 þ kÞt 8
• Here CFj,t is the cash flow denominated in a particular currency (which may be dollars)
and Sj,t denotes represents the exchange rate at which the MNC can convert the foreign
to the domestic currency at the end of period t.
• Whereas the previous equation is applied to single-period cash flows, this equation
considers cash flows over multiple periods and then discounts those flows to obtain a
present value.
• Since the management of an MNC should be focused on maximizing its value, the
equation for valuing an MNC is extremely important.
• According to this equation, the value (V) will increase in response to managerial
decisions that increase the amount of its cash flows in a particular currency (CFj) or to
conditions that increase the exchange rate at which that currency is converted into
dollars (Sj).
• To aoid doule ounting, ash flos of the MNC’s susidiaries are onsidered in the
valuation model only when they reflect transactions with the U.S. parent.
• Therefore, any expected cash flows received by foreign subsidiaries should not be
counted in the valuation equation unless they are expected to be remitted to the
parent.
• The denominator of the valuation model for the MNC remains unchanged from the
original valuation model for the purely domestic firm.
• However, note that the weighted average cost of capital for the MNC is based on
funding some projects involving business in different countries.
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EECS 1019 Full Course Notes
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