Consider the following point and counter-point arguments. Which argument to you support? Explain why and offer your own opinion on the issue.
Point: Investors should not care about an MNCâs translation exposure. The present value of an MNCâs cash flows is based on the cash flows that the parent receives. Any impact of the exchange rates on the financial statements is not important unless cash flows are affected. MNCs should focus their energy on assessing the exposure of their cash flows to exchange rate movements and should not be concerned with the exposure of their financial statements to exchange rate movements. Value is about cash flows, and investors focus on value.
Counter-Point: Investors should care about an MNCâs translation exposure. Investors do not have sufficient financial data to derive cash flows. They commonly use earnings as a base, and if earnings are distorted, so will be their estimates of cash flows. If they underestimate cash flows because of how exchange rates affected the reported earnings, they may underestimate the value of the MNC. Even if the value is corrected in the future once the market realizes how the earnings were distorted, some investors may have sold their stock by the time the correction occurs. Investors should be concerned about an MNCâs translation exposure. They should recognize that the earnings of MNCs with large translation exposure might be more distorted than the earnings of MNCs with low translation exposure.
Consider the following point and counter-point arguments. Which argument to you support? Explain why and offer your own opinion on the issue.
Point: Investors should not care about an MNCâs translation exposure. The present value of an MNCâs cash flows is based on the cash flows that the parent receives. Any impact of the exchange rates on the financial statements is not important unless cash flows are affected. MNCs should focus their energy on assessing the exposure of their cash flows to exchange rate movements and should not be concerned with the exposure of their financial statements to exchange rate movements. Value is about cash flows, and investors focus on value.
Counter-Point: Investors should care about an MNCâs translation exposure. Investors do not have sufficient financial data to derive cash flows. They commonly use earnings as a base, and if earnings are distorted, so will be their estimates of cash flows. If they underestimate cash flows because of how exchange rates affected the reported earnings, they may underestimate the value of the MNC. Even if the value is corrected in the future once the market realizes how the earnings were distorted, some investors may have sold their stock by the time the correction occurs. Investors should be concerned about an MNCâs translation exposure. They should recognize that the earnings of MNCs with large translation exposure might be more distorted than the earnings of MNCs with low translation exposure.
For unlimited access to Homework Help, a Homework+ subscription is required.