Capital Budgetingfromthe ParentFirm's Perspective: ExampleA U.S.-based MNC is considering aEuropean opportunityIt's a simple example:There is no incremental debt.There is no incremental depreciationThere are no concessionary loansThere are no restricted funds
Capital Budgeting from the Parent Firm’s Perspective: Example ❖A U.S.-based MNC is considering a European opportunity. ❖It’s a simple example: ▪ There is no incremental debt. ▪ There is no incremental depreciation. ▪ There are no concessionary loans. ▪ There are no restricted funds
Capital Budgetingfromthe ParentFirm's Perspective: ExampleWecan use a simplifiedAPV:S,OCF(1 -T)NAPV =-T1 + Kud)t = 1IS.TSoCo + SRF + SeLo+2(X+ Kud)71 +ia)TS,OCF(1 - t)- S.CoZAPVnoincrementaldebt二no incrementaldepreciation=(1 + Kud)noconcessionaryloansnorestrictedfunds
Capital Budgeting from the Parent Firm’s Perspective: Example ❖We can use a simplified APV: APV = t S = 1 T StOCFt (1 – ) (1 + Kud) t – S0C0 APV = S t = 1 T (1 + Kud) t TVT (1 + Kud) T + Dt (1 + id ) t + – StOCFt (1 – ) S0C0 + S0RF0 + S0CL0 + S t = 1 T St It (1 + id ) S t St + t = 1 T St LPt (1 + id ) S t St t = 1 T no incremental debt no incremental depreciation no concessionary loans no restricted funds
Capital Budgetingfromthe ParentFirm's Perspective: ExampleA U.S. MNC is considering a European opportunity.The size and timing of the after-tax cash flows are:-E60020050030011HH2301The inflation rate in the euro zone is πe = 3%, the inflationrate in dollars is ps = 6%, and the business risk of theinvestment would lead an unlevered U.S.-based firm todemand a return of Kud = is = 15%.The current exchange rate is So($/E) = $1.25/e. Is this a go08investment from the perspective of the U.S. shareholders?
Capital Budgeting from the Parent Firm’s Perspective: Example The inflation rate in the euro zone is € = 3%, the inflation rate in dollars is p$ = 6%, and the business risk of the investment would lead an unlevered U.S.-based firm to demand a return of Kud = i$ = 15%. –€600 0 €200 1 €500 2 €300 3 A U.S. MNC is considering a European opportunity. The size and timing of the after-tax cash flows are: The current exchange rate is S0 ($/€) = $1.25/€. Is this a good investment from the perspective of the U.S. shareholders?