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Applied International Finance by Thomas J. O'Brien

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CHAPTER 8

Cross-Border Valuation

In the previous chapter, we used the home currency approach to international capital budgeting, where the analyst converts the expected foreign currency cash flows into home currency equivalents using forecasted FX rates, and then discounts them using a cost of capital denominated in the home currency. As we have said, in the foreign currency approach, the analyst uses the expected cash flows denominated in the foreign currency, and discounts them using a cost of capital denominated in the foreign currency.

The typical textbook advice is that the currency perspective is irrelevant in cross-border valuation analyses, given consistent conversions of expected cash flows and cost of capital across currencies. We’ll ...

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