EECS 1019 Lecture Notes - Lecture 25: Cash Flow, Weighted Arithmetic Mean
15 Jun 2018
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EECS 1019 Lecture 25 Notes
Introduction
Multinational Model
• In making decisions that affect its cost of debt or equity for one or more projects, the
firm also affects the weighted average of its cost of capital and thus the required rate of
return.
• If the fi’s edit atig is suddel loeed, fo eaple, the its ost of apital ill
probably increase and so will its required rate of return.
• Holdig othe fatos ostat, a iease i the fi’s euied ate of etu ill
reduce the value of the firm because expected cash flows must be discounted at a
higher interest rate.
• Coesel, a deease i the fi’s euied ate of etu ill iease the alue of the
firm because expected cash flows are discounted at a lower required rate of return.
• A MNC’s alue a e speified i the sae ae as a puel doesti fi’s alue.
• However, consider that the expected cash flows generated by a U.S.-ased MNC’s
parent in period t may be coming from various countries and so may be denominated in
different foreign currencies.
• The foreign currency cash flows will be converted into dollars.
• Thus, the expected dollar cash flows to be received at the end of period t are equal to
the sum of the products of cash flows denominated in each currency j multiplied by the
expected exchange rate at which currency j could be converted into dollars by the MNC
at the end of period t: EðCF$,tÞ ¼ Xm j¼1 ½EðCFj,tÞ EðSj,t Þ
• Here CFj,t represents the amount of cash flow denominated in a particular foreign
currency j at the end of period t, and Sj,t denotes the exchange rate at which the foreign
currency (measured in dollars per unit of the foreign currency) can be converted to
dollars at the end of period t.
• Affect its cost of debt or equity for one or more projects, the firm also affects the
weighted average of its cost of capital and thus the required rate of return.
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EECS 1019 Full Course Notes
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