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Basic steps in capital budgeting for a foreign project
Identify the initial capital invested or put at risk
Estimate cash flows to be derived from the project over time, including an estimate of the terminal or salvage value of the investment
Identify appropriate discount rate to use in valuation
Apply traditional capital budgeting decision criteria such as NPV or IRR
Parent CF’s must be distinguished from ____
project cash flows
Parent CF’s often depend on the ______
form of financing
Almost any project should at least be able to generate a return equal to ____
the yield available on host government bonds
Multinational firms should invest only if they can earn a risk-adjusted return greater than ____
locally based competitors can earn on the same project
Sensitivity Analysis Variables: Project Viewpoint
Political Risk
Foreign Exchange Risk
Other sensitivity variables
Change in assumed terminal value
Capacity utiliization rate
Size of initial project cost
Amount of working capital financed locally
Sensitivity Analysis: Parent Viewpoint
Adjusting Discount Rates
Adjusting CFs
Shortcomings of Each method
Repercussions to the investor
Fear that taking on foreign projects may increase the firm’s overall cofst of capital because of investors’ perceptions of foreign risk
Portfolio Measurement
Standard deviation of expected return
Beta
Foreign investments are motivated by objectives:
Market-seeking
Resource-seeking
Production-seeking
Real Option Analysis
Application of the option theory to capital budgeting decisions
Real Options Analysis is a cross between ____
decision-tree analysis and pure option-based valuation
Real Options Valuation choices
Option to defer
Option to abandon
Option to alter capacity
Option to start up or shut down
Properties of project finance that influences success
Separability of the Project from its Investors
Long-lived and Capital-Intensive Singular Projects
Cash Flow predictability from Third Party Commitments
Finite Projects with Finite Lives
By acquiring an existing firm, the MNE ____
shortens the time requierd to gain a presence and facilitate competitive entry into the market
Acquisition may be a cost-effective way of gaining competitive advantages, such as_____
technology
Brand names valued in the target market
Logistical and distribution advantages
Cross-border acquisitions negatives
Problems with paying too much/suffering excessive financing costs
Melding corporate cultures can be traumatic
Managing the post-acquisition process is frequently characterized by downsizing to gain economies of scale and scope in overhead functions
Additional difficulties:
host country intervening in pricing, financing, employment guarantees, market segmentation, and general nationalism/favoritism
Cross Border Acquisition Process
Stage 1: Identification and Valuation
Identification of potential acquisition targets requires a well-defined corporate strategy and focus
Stage 2: Completion of the Ownership Change
Process of gaining approval from management and ownership of the target, getting approvals from government regulatory bodies, and finally determining method of compensation can be time-consuming and complex
Stage 3: Post-Acquisition Transition Management
Probably the most critical of the 3 stages in determining an acquisition’s success or failure
Stage 1 of the Cross Border Acquisition Process
Identification and Valuation
Identification of potential acquisition targets requires a well-defined corporate strategy and focus
Stage 2 of the Cross Border Acquisition Process
Stage 2: Completion of the Ownership Change
Process of gaining approval from management and ownership of the target, getting approvals from government regulatory bodies, and finally determining method of compensation can be time-consuming and complex
Stage 3 of the Cross Border Acquisition Process
Stage 3: Post-Acquisition Transition Management
Probably the most critical of the 3 stages in determining an acquisition’s success or failure
Financial Analysis Strategy of a Cross-Border Acquisition Process
Stage 1: Valuation and Negotiation
Stage 2: Financial settlement and compensation
Stage 3: Rationalization of operations; integration of financial goals; achieving synergies
Currency Risks in Cross-Border Acquisitions
Step 1: Bidding Stage (most risky)
Step 2: Financing Stage (Moderately risky)
Step 3: Transaction Stage (less risky)
Step 4: Operational stage (low risk)