Cross border valuation

Description
To value companies or subsidiaries in foreign countries standard valuation methods apply (Enterprise Discounted Cash Flows, Adjusted Present Value, Discounted Economic Profit). However, valuing companies in foreign countries does require a comprehensive understanding of exchange rate risk and its impact on investment decisions.


The spot-rate and forward rate methods are two commonly used techniques for valuing companies in foreign currencies.


The spot-rate method involves forecasting future cash flows in the foreign currency, discounting them at the foreign cost of capital, and then converting the present value using the current FX spot rate. In contrast, the forward rate method involves projecting future cash flows in the foreign currency, converting them into the domestic currency using the forward FX rate (assuming purchasing power parity), and discounting them at the domestic cost of capital.


The proposed valuation model creates simplified projections in foreign currency, projects inflation and interest rates in accordance with the Fisher effect, estimates the cost of capital in both domestic and foreign currencies (accounting for inflation differences), and applies enterprise DCF under each method. While both spot-rate and forward rate methods have their pros and cons, they should produce identical results if consistent monetary assumptions are used.