Dfas

In: Business and Management

Submitted By jalal9958
Words 353
Pages 2
VALUATION MODEL FOR AN MNC
The value of an MNC is relevant to its shareholders and its debtholders. When managers make decisions that maximize the value of the firm, they maximize shareholder wealth
(assuming that the decisions are not intended to maximize the wealth of debtholders at the expense of shareholders). Since international financial management should be conducted with the goal of increasing the value of the MNC, it is useful to review some basics of valuation. There are numerous methods of valuing an MNC, and some methods will lead to the same valuation. The valuation method described in this section can be used to understand the key factors that affect an MNC’s value in a general sense.
Domestic Model
Before modeling an MNC’s value, consider the valuation of a purely domestic firm that does not engage in any foreign transactions. The value (V) of a purely domestic firm in the United States is commonly specified as the present value of its expected cash flows,
V ¼
Xn
t¼1
½EðCF$;t Þ_ ð1 þ kÞt
_ _ where E(CF$,t) represents expected cash flows to be received at the end of period t, n represents the number of periods into the future in which cash flows are received, and k represents the weighted average cost of capital, and also the required rate of return by investors and creditors who provide funds to the MNC.
Dollar Cash Flows. The dollar cash flows in period t represent funds received by the firm minus funds needed to pay expenses or taxes, or to reinvest in the firm (such as an investment to replace old computers or machinery). The expected cash flows are estimated from knowledge about various existing projects as well as other projects that will be implemented in the future. A firm’s decisions about how it should invest funds to expand its business can affect its expected future cash flows and therefore can affect the
firm’s…...

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