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Lecture Multinational financial management - Topic 15: Global capital budgeting and country risk. In this chapter, students will be able to understand value foreign investments using sovereign risk premiums, foreign proxies, cashflow adjustments and exchange rate forecasts. | Topic #15: Global Capital Budgeting and Country Risk L. Gattis The Pennsylvania State University 0 Finance 407: Multinational Financial Management Review Poll: NPV 1 Caterpillar, Inc. is investing $100M to build a plant in Indiana and expects three years of annual EBIT of $25M, depreciation of $15M, CAPEX of $10M, and additions to working capital $5M. CAT’s tax rate is 40% and beta is 1.7. The risk free rate is 2% and the market risk premium is 5%. CAT’s credit spread on its debt is 4% and D/E ratio is 0.6. CAT estimates that the investment is worth 5 times FCF in year 4. What is the NPV of the investment? (Hint: Compute NPV for initial investment + the present value of 3 FCFs + the present value of the exit multiple valuation) Hints:CF(0)=-$100, CF(1)=25*(1-.4)+15-10-5=$15, D/(D+E)=.6/1.6 A. -$12M B. -$6M C. $0M D. +$6M E. +$12M Review Poll: NPV 2 Caterpillar, Inc. is investing $100M to build a plant in Indiana and expects three years of annual EBIT of $25M, depreciation of $15M, . | Topic #15: Global Capital Budgeting and Country Risk L. Gattis The Pennsylvania State University 0 Finance 407: Multinational Financial Management Review Poll: NPV 1 Caterpillar, Inc. is investing $100M to build a plant in Indiana and expects three years of annual EBIT of $25M, depreciation of $15M, CAPEX of $10M, and additions to working capital $5M. CAT’s tax rate is 40% and beta is 1.7. The risk free rate is 2% and the market risk premium is 5%. CAT’s credit spread on its debt is 4% and D/E ratio is 0.6. CAT estimates that the investment is worth 5 times FCF in year 4. What is the NPV of the investment? (Hint: Compute NPV for initial investment + the present value of 3 FCFs + the present value of the exit multiple valuation) Hints:CF(0)=-$100, CF(1)=25*(1-.4)+15-10-5=$15, D/(D+E)=.6/1.6 A. -$12M B. -$6M C. $0M D. +$6M E. +$12M Review Poll: NPV 2 Caterpillar, Inc. is investing $100M to build a plant in Indiana and expects three years of annual EBIT of $25M, depreciation of $15M, CAPEX of $10M, and additions to working capital $5M. CAT’s tax rate is 40% and beta is 1.7. The risk free rate is 2% and the market risk premium is 5%. CAT’s credit spread on its debt is 4% and D/E ratio is 0.6. CAT estimates that the investment is worth 5 times FCF in year 4. What is the NPV of the investment? (Hint: Compute NPV for initial investment + the present value of 3 FCFs + the present value of the exit multiple valuation) Hints:CF(0)=-$100, CF(1)=25*(1-.4)+15-10-5=$15, D/(D+E)=.6/1.6 A. -$12M B. -$6M C. $0M D. +$6M E. +$12M Learning Objectives 3 Students can value foreign investment using sovereign risk premiums, foreign proxies, and exchange rate forecast mitigate country risk NPV, WACC, and Risk 4 Same Business Risk Same Leverage Compute WACC using current values of the Firm’s E, D, Kd, and Ke Different Capital Structure (Leverage) Steps: (1) Re-lever Firm’s beta (2) compute new debt spread (3) Compute new E, D, Kd, Ke, and WACC Different Business Risk (Incl. Country Risk) .
