1

Formula Sheets: FINA 5500

Exam 1
Valuation Model
Valuation model for MNC:
( ) ( ) | |
E CF E ER
m

( ) ( ) | |
( )
Value =
E CF E ER
, ,
=
j t j t
j
t
t
n
k

+

=1
1
1
where E (CF
j,t
) = expected cash flows denominated
in currency j to be received by the
U S t t th d f i d t U.S. parent at the end of period t
E (ER
j,t
) = expected exchange rate at which
currency j can be converted to
dollars at the end of period t
k = the weighted average cost of capital of
the U.S. parent company
2
Opportunity Cost Analysis
The opportunity cost of product X (in The opportunity cost of product X (in
terms of product Y)
= How many units of product Y does it take
to make one unit of product X
= number of units of product Y per one unit p p
of product X
= cost of Y / cost of X
BOP Accounting
ACCOUNT CREDITS DEBITS
Merchandise: A. Export of Goods B. Import of Goods
Service: C. Export of Service D. Import of Service
Net Investment
Income:
E. Income from Foreign
Investments
F. Income paid to
Foreign Investors
Unilateral
Transfers:
G. Transfers to US from
Overseas
H. Transfers to
Overseas from US Transfers: Overseas Overseas from US
Capital Flows: I. Increase in Foreign
Investments in US /
Decrease in US
investments overseas
J. Decrease in Foreign
Investments in US /
Increase in US
investments overseas
Official Reserve: K. Decrease in Official
Holding of FX & Gold
L. Increase in Official
Holding of FX & Gold

3
BOP Accounting (contd.)
Balance of Trade (BOT) = (A - B) + (C-D)
Current Account Balance = (A-B) + (C-D) + (E-F) + (G-H)
Capital Account Balance = (I-J)
Official Reserve Balance = (K-L)
Current Account + Capital Account + Official Reserve = 0
Currency Conversion
Quotes: DQ (direct quote): The dollar price of one unit of foreign currency (FC)
IQ (indirect quote): Number of units of FC per one dollar; DQ = 1 / IQ and IQ = 1 / DQ
Currency Conversion:
Converting USD into FC Converting FC into USD
Using DQ USD / DQ = FC FC * DQ = USD
Using IQ USD * IQ = FC FC / IQ = USD
DQ0 (IQO) = Direct (indirect) quote, at the beginning of the period
DQ1 (IQ1) = Direct (indirect) quote, at the end of the period
% change in DQ = 100*(DQ1 DQ0) / DQ0 ; or % change in DQ = 100*[100 / (100 + % change in IQ) - 1]
% change in IQ = 100*(IQ1 IQ0) / IQ0 ; or % change in IQ = 100*[100 / (100 + % change in DQ) - 1]
Ask Price (A): The buying price for one unit of FC from the currency dealer; Bid Price (B): The selling price for one unit of FC to the
currency dealer; Bid-Ask Spread = 100* (A B) / A
Cross-Quotes: DQ1= $ price of FC1; DQ2 = $ price of FC2;
The price of FC1 in terms of FC2 (how many unit of FC2 does it take to buy one FC1) = DQ1 / DQ2
The price of FC2 in terms of FC1 (how many unit of FC1 does it take to buy one FC2) = DQ2 / DQ1
Bid-Ask cross quotes (Let ASK
1
and BID
1
& ASK
2
and BID
2
be the Ask and Bid prices for FC
1
and FC
2
in DIRECT QUOTES) :
Ask price of FC
1
in terms of FC
2
= ASK
1
/ BID
2
; and Bid price of FC
1
in terms of FC
2
= BID
1
/ ASK
2
Ask price of FC
2
in terms of FC
1
= ASK
2
/ BID
1
; and Bid price of FC
2
in terms of FC1 = BID
2
/ ASK
1
Forward Premium or Discount: [(forward rate spot rate) / spot rate] * [360/days to maturity] * 100
Dollar Return on foreign assets = (1 + Rf) (1 + Rx) - 1
Rf = return on foreign assets based on foreign currency
Rx = return on foreign currency = same as percentage change in DQ