Valuation: Measuring and Managing the Value of Companies, Fifth Edition

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Foreign Currency

To value businesses, subsidiaries, or companies in foreign countries, follow the same principles and methods that we presented in Part Two. Fortunately, such valuations have become simpler over the past few years as international accounting differences have rapidly diminished. Most of the world’s major economies have now adopted either International Financial Reporting Standards (IFRS) or U.S. generally accepted accounting principles (GAAP), and these two standards are rapidly converging. Also, remember that if you follow the recommendations for rearranging financial statements in Chapter 7, you will get identical results regardless of which accounting principles you follow to prepare the financial statements.

Nevertheless, the following issues arising in cross-border valuations still need special attention:

• Forecasting cash flows in foreign currency (the currency of the foreign entity to be valued) and domestic currency (the home currency of the person doing the valuation).

• Estimating the cost of capital in foreign currency.

• Incorporating foreign-currency risk in valuations.

• Using translated foreign-currency financial statements.

For each of these issues, this chapter highlights the steps that require special analyses.

FORECASTING CASH FLOWS IN FOREIGN AND DOMESTIC CURRENCY

To value a company with international operations, first forecast the components of cash flow in their most relevant currency. This means forecasting the British-pound cash flows ...