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Week 10: International Corporate Finance (Internationally Integrated…
Week 10: International Corporate Finance
Issues when making foreign investments
foreign currency (firm is more interested in the home currency)
a different cost of capital
firm faces a different tax rate in a foreign country
Spot rate and Forward rate
Spot rate
current rate at which that currency can be converted into another currency
set by the financial markets
Forward rate
rate that can be converted in the future (similar to derivatives)
Interest rate parity (p.4) (
unclear intuition
)
Internationally Integrated Capital Markets
Method 1. Using foreign currency cost of capital
Method 2. Price = Spot rate x NPV of foreign CFs (at time 0)
Method 2. Price = Forward rate x CFs of foreign investments (
at time 1
)/ discounted back to time 0 (
using cost of capital in the domestic market
)
Summary: page 9 (derived of interest parity - under perfectly integrated markets)
Value of an investment does not depend on the currency used (
in a perfect capital markets
)
Calculate forward rate in
different periods
Using the Law of one price as a Robustness Check
notation
star: cost of capital
no star: interest rate
The foreign cost of capital must satisfy the Law of One Price (
this formula is a bit confusing
)
Valuation and International Taxation
taxes are paid to
host government
home government
also consider: foreign project which is a
separately incorporated subsidiary
of the parent company
Repatriated profits
: profits from a foreign project that a firm brings back to its home country
Lower the taxes using
Pooling multiple foreign projects
(p.30: a bit confusing)
Deferring repatriation
Internationally Segmented Capital Markets
Segmented Capital Markets: not internationally integrated
(more on page 32)
Firms may face
differential access
to markets
Example: page 34
Implications (p.35)
Capital budgeting with exchange rate risk
example: p.40
table p.42 (carefully calculate the tax)
If the value of the dollar appreciates against the pound, the pound cost of these materials will increase => reducing the pound FCFs