Multinational Valuation

International Finance
 Discounted cash flow method

• DCF incorporates the future cash flows ofcompany, its discount rate
(WACC – weighted average capital cost) and time period of the
projections.
• Step 1: Determination of Free Cash Flow
• Free cash flow represents the cash flow available for distribution.
Formula usually used to calculate free cash flow (to the firm):

• Where, EBIT = Earnings Before Interest and Taxes

• d(NWC) = Change in Net Working Capital
Defined as (Current Assets – Current Liabilities) at current period less (Current Assets –
Current Liabilities) at previous period
 • CAPEX = Capital Expenditure
Defined as (Property, Plant and Equipment + Intangible Assets) at current period less (Property,
Plant and Equipment + Intangible Assets) at previous period.
• D&A = Depreciation & Amortization

• FCF in complex situations, where balance sheet items cannot be easily determined
(e.g. in the case of multinational companies), can be also calculated as:

• Step 2: Determination of WACC

• Step 3: DCF Calculation
DCF Formula

Where:

TV = Terminal Value

i = the specified year

n = the number of years

 DCF Formula

• Terminal value

• The second part of the equation is called Terminal Value. This is done to compensate
for uncertain future returns (i.e. future cash flows cannot be estimated up to infinity).
• This formula uses the stable growth model
• This model assumes that the company will grow with a specific growth rate defined
as g. It has been suggested that this growth should have two main features:
• a) It should represent the company’s growth at maturity in its life cycle
• b) it should be less than the world’s or country’s GDP growth rate (otherwise the
company would be “larger” than the world at infinity).
(source: Damodaran)
 Valuation Model for an MNC

 
     
m

n  
 j 1
E CF j , t  E ER j , t 

Value =   
t =1  1  k  t

 
 V changes result from

• (1) Changes in foreign market conditions: Will impact on foreign currency

earnings and thus on foreign currency cash flows (CF).
• (2) Changes in political environment and political risk (policy of foreign
government towards MNC): Will impact on foreign currency earnings and thus
on foreign currency cash flows (CF).
• (3) Changes in the MNC’s cost of capital, i.e., the required return (k).
• (4) Changes in the exchange rate resulting from exposure to exchange rate risk
(S); noting that:
• Stronger foreign currency will increase U.S. dollar equivalent of cash flows.
• Weaker foreign currency will decrease U.S. dollar equivalent of cash flows.
 Example: MNC Valuation
  YEAR
  1 2 3 4 5 6
EBIT 4,753.00 5,729.00 6,000.00 6,500.00 7,800.00 8,500.00

Effective Tax Rate 0.16 0.15 0.11 0.14 0.20 0.26

Dep. & Amort. 5,951.00 6,113.00 4,600.00 5,900.00 5,000.00 1,131.00
Capital Expenditure 836.00 1,183.00 1,270.00 1,285.00 1,131.00 1,131.00
Change in Working Capital 544.00 297.00 206.00 285.00 1,026.00 315.00

Free Cash FLOW 8,563.52 9,502.65 8,464.00 9,920.00 9,083.00 5,975.00

Exch. Rate 0.50 0.52 0.51 0.49 0.48 0.48

FCF in USD 4,281.76 4,941.38 4,316.64 4,860.80 4,359.84 2,868.00

WACC   0.09        

Growth to perpetuity   0.03        

    4,941.38 4,316.64 4,860.80 4,359.84 2,868.00
PV of FCF 3,931.11 4,165.17 3,340.59 3,453.64 2,844.02 1,717.64
Terminal Value           49,899.32
PV of Terminal Value 29884.6978          
Value of the firm 49,336.87          
Example: MNC Valuation