Question 1

Which of the following are categories of assumptions needed when making projections of and discounting cash flows in different currencies?
I.Inflation assumptions.
II.Cash flow projections.
III.Forward exchange rates.

Accepted Answer

All three categories, Inflation assumptions, Cash flow projections, and Forward exchange rates, are crucial when making projections of and discounting cash flows in different currencies. Inflation assumptions affect the real value of cash flows, cash flow projections are necessary to estimate the amount and timing of cash flows, and forward exchange rates are used to convert future cash flows into a single currency for comparison or aggregation.

Question 2

In the process of estimating the value of foreign companies,with respect to including an additional risk premium in the discount rate to adjust for perceived currency risk,which of the following are true?
I.The risk premiums would probably be relatively small.
II.Currency risk premiums are the reason shareholders would benefit if managers increased their level of currency management.
III.Currency risk premiums are the reason a global application of the CAPM is not recommended.
IV.It is likely that currency risk premiums are included in the spot and/or forward exchange rates used to translate currencies.

Accepted Answer

I is true because currency risk premiums are typically small compared to other types of risk premiums.

IV is true because currency risk premiums are already included in spot and forward exchange rates.

II and III are false. Shareholders would not necessarily benefit from increased currency management, and a global application of CAPM is still recommended despite currency risk premiums.

Question 3

Market data across countries do show differences in realized premiums,and this is mainly because the markets have distinct systematic risk factors.

Accepted Answer

False

Question 4

The cost of capital is best estimated from the perspective of a global investor and using both the market risk premium and beta measured against a global market portfolio and not against a local (foreign or domestic )market portfolio.

Accepted Answer

The cost of capital should be estimated from a global investor's perspective as it takes into account all the risks associated with the investment. Estimating the cost of capital using both the market risk premium and beta in a global market portfolio provides a more accurate picture of the overall risk associated with the investment. Measuring the beta against a local market portfolio may not provide an accurate estimate of the risk from a global perspective.

Question 5

An analyst is estimating the value of a subsidiary using International Financial Reporting Standards (IFRS),and the country of the subsidiary is experiencing moderate inflation.In this case,which of the following accounting techniques is recommended?

Accepted Answer

The answer of An analyst is estimating the value of...

Question 6

In the next two years,the expected inflation rates are 1 percent and 2 percent,respectively,and the real interest rates are expected to be 4 percent and 4 percent,respectively.Using this information,calculate the two-year interest rate yield as of now.

Accepted Answer

The nominal interest rate can be calculated using the formula: nominal rate = real rate + inflation rate. For the first year, it's 4% + 1% = 5%. For the second year, it's 4% + 2% = 6%. The two-year yield is the average of these two rates: (5% + 6%) / 2 = 5.5%. However, to be more precise, we calculate the geometric average: [(1.05)*(1.06)]^(1/2) - 1 = 5.56%.

Question 7

An analyst is using U.S.Generally Accepted Accounting Principles (GAAP )to estimate the value of a subsidiary of a U.S.firm,and the country of the subsidiary is experiencing hyperinflation.In this case,which of the following accounting techniques is recommended?

Accepted Answer

The temporal method is recommended in this scenario as it adjusts the value of the subsidiary's assets and liabilities to reflect the current exchange rate and inflation. This method is specifically designed to account for hyperinflation in a foreign subsidiary's country. Other methods, such as the current method and inflation-adjusted current method, may not accurately reflect the economic conditions in the subsidiary's country. Autoregressive method is not an accounting technique used for financial statement preparation.

Question 8

Which of the following are issues to address when analyzing foreign companies?
I.Making forecasts in foreign and domestic currencies.
II.Estimating the cost of capital in a foreign currency.
III.Incorporating foreign-currency risk in valuations.
IV.Using translated foreign-currency financial statements.

Accepted Answer

When analyzing foreign companies, it is important to address all of the listed issues. Making forecasts in both foreign and domestic currencies is important to understand the potential impact of currency fluctuations. Estimating the cost of capital in a foreign currency is necessary to properly value the company. Incorporating foreign-currency risk in valuations is important to properly assess the potential risks and returns of investing in the company. Finally, using translated foreign-currency financial statements is necessary to understand the financial position and performance of the company.

Question 9

Which of the following are reasons the forward-rate method is more complex than the spot-rate method in estimating the value?
I.Incomplete data.
II.Extra calculations.
III.The possibility of multiple solutions.
IV.The use of more than one currency in the estimation process.

Accepted Answer

The forward-rate method requires more calculations and the possibility of multiple solutions.

Question 10

List and describe the two methods for converting forecasted cash flows from one currency into another.

Accepted Answer

The answer of List and describe the two methods for...

Question 11

It is generally accepted practice to make ad hoc adjustments to the discount rate to reflect political risk,foreign-investment risk,or foreign-currency risk.

Accepted Answer

It is generally not considered best practice to make ad hoc adjustments to the discount rate to reflect political risk, foreign-investment risk, or foreign-currency risk. Instead, these risks are more accurately accounted for through adjustments in the cash flow projections or through the use of specific risk premiums that are more transparent and methodologically sound.

Quiz 23: Cross-Border Valuation

Which of the following are categories of assumptions needed when making projections of and discounting cash flows in different currencies? I.Inflation assumptions. II.Cash flow projections. III.Forward exchange rates.

Market data across countries do show differences in realized premiums,and this is mainly because the markets have distinct systematic risk factors.

The cost of capital is best estimated from the perspective of a global investor and using both the market risk premium and beta measured against a global market portfolio and not against a local (foreign or domestic )market portfolio.

An analyst is estimating the value of a subsidiary using International Financial Reporting Standards (IFRS) ,and the country of the subsidiary is experiencing moderate inflation.In this case,which of the following accounting techniques is recommended?

In the next two years,the expected inflation rates are 1 percent and 2 percent,respectively,and the real interest rates are expected to be 4 percent and 4 percent,respectively.Using this information,calculate the two-year interest rate yield as of now.

An analyst is using U.S.Generally Accepted Accounting Principles (GAAP ) to estimate the value of a subsidiary of a U.S.firm,and the country of the subsidiary is experiencing hyperinflation.In this case,which of the following accounting techniques is recommended?

Which of the following are reasons the forward-rate method is more complex than the spot-rate method in estimating the value? I.Incomplete data. II.Extra calculations. III.The possibility of multiple solutions. IV.The use of more than one currency in the estimation process.

List and describe the two methods for converting forecasted cash flows from one currency into another.

It is generally accepted practice to make ad hoc adjustments to the discount rate to reflect political risk,foreign-investment risk,or foreign-currency risk.