EECS 1520 Lecture 2: EECS 1520 Lecture 2 Notes
21 Jun 2018
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EECS 1520 Lecture 2 Notes
Introduction
Austin anticipation
Exhibit 1.4 summarized how an MNC’s expected cash flows and valuation are subject to
uncertainty through exposure to international conditions.
Up to this point, the possible impact of each international condition on an MNC’s cash
flows has been treated in isolation.
In reality, however, an MNC must consider the impact of all international conditions so
that it can determine the resulting effect on its cash flows.
EXAMPLE
Recall the original example of Austin Co., a U.S.-based MNC that expects to generate
$40 million annually in cash flows from its operations in the United States and 20 million
euros annually in cash flows from its operations in Europe over the next three years.
Assume that Austin anticipates a possible European recession during this period and
therefore revises its expectations as follows to reflect that possibility.
The company expects that a European recession will adversely affect the U.S. economy
and result in reduced U.S. demand for its computer games
it therefore reduces its estimated dollar cash flows from U.S. operations to $38 million
annually over the next three years.
Austin expects that a European recession will result in a reduced European demand for
its computer games, so it lowers its estimated euro cash flows from European
operations to 16 million euros annually over the next three years.
The firm expects that a European recession will weaken the euro and hence lowers its
estimate of the euro’s value to $1.20 over the next three years.
Altogether, then, Austin’s expected annual cash flows for each of the next three years
are now calculated as follows.
Austin’s total expected $ cash flows each year ¼ $ cash flows from U:S: operations þ $
cash flows from foreign operations ¼ $ cash flows from U:S: operations þ ½ðeuro cash
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EECS 1520 Full Course Notes
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