EECS 1019 Lecture Notes - Lecture 26: Cash Flow
15 Jun 2018
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EECS 1019 Lecture 26 Notes
Introduction
Valuation of an MNC That Uses Two Currencies
• An MNC that does business in two currencies could measure its expected dollar cash
flows in any period by multiplying the expected cash flow in each currency by the
expected exchange rate at which that currency could be converted to dollars and then
summing those two products.
• It may help to think of an MNC as a portfolio of currency cash flows, one for each
currency in which it conducts business.
• The expected dollar cash flows derived from each of those currencies can be combined
to determine the total expected dollar cash flows in the given period.
• It is easier to derive an expected dollar cash flow value for each currency before
combining the cash flows among currencies within a given period, because each
urre’s ash flo aout ust e oerted to a common unit (the dollar) before
combining the amounts.
• Carolina Co. has expected cash flows of $100,000 from local business and 1 million
Mexican pesos from business in Mexico at the end of period t.
• Assuig that the peso’s alue is epeted to e $.09 when converted into dollars, the
expected dollar cash flows
• EðCF$,tÞ ¼ Xm j¼1 ½EðCFj,tÞ EðSj,t Þ¼ ð$100,000Þ þ ½1,000,000 pesos ð$:09Þ¼
ð$100,000Þ þ ð$90,000Þ ¼ $190,000
• The cash flows of $100,000 from U.S. business were already denominated in U.S. dollars
and therefore did not have to be converted.
• The same process as just described can be employed to value an MNC that uses many
foreign currencies.
• The general formula for estimating the dollar cash flows to be received by an MNC from
multiple currencies in one period can be written
• EðCF$,tÞ ¼ Xm j¼1 ½EðCFj,tÞ EðSj,t Þ
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