Index

Aerotech Components Co., 65

All-equity beta, 37

American Depositary Receipts (ADRs), 10–14

Anderson-Wheeler, 38–39

Asset’s rate of return

in different currencies, 4–5, 30–31

Baidu (China), 11

Bank of New York Mellon, 10

Beta

FX operating exposure and, 98–103

proxy approach and, 37–39

unlevering formula, 38

BHP Billiton Ltd (Australia), 12

BHP Billiton Plc (United Kingdom), 12

Business value, 37. See also Unlevered value

intrinsic, 84

Capital Asset Pricing Model (CAPM), 1

global, 5–8

global vs. local, 8–10

review of, 2–4

CAPM. See Capital Asset Pricing Model

Cash flow

conversion

expected operating, 65–68

FX exposures and currency directions, 68, 74

incremental, 95–96

multiperiod, 83–85

CDS. See Credit default swap

Cohrs, Dan, 35

Conversion(s)

cost of capital, 58–59, 63

expected cash flow, 64–68

hurdle rate, 58–64

Cost of capital

conversion, 58–59, 63

ICAPM and, 24–27

international, 113–118

operation-specific risk and, 36–37

weighted vs. direct, 37

Country beta, 40

Cost of equity estimates, 13, 30, 36

Credit default swap (CDS), 44

Credit Suisse Research Institute Global Wealth Databook, 20

Cross-border mergers and acquisitions (M&A), 94–95

Cross-border valuation

foreign versus home currency, 86–87

framework for, 73–75

intrinsic FX rates and, 75–78

misvalued future FX rates, 81–83

misvalued time-0 spot FX rate, 79–80

multiperiod cash flow and, 83–85

Cross-listed stocks, 10

Currency

beta estimates, 100

risk premium, 59–64

volatility estimates (vs. US Dollar), 75

Daimler AG (Germany), 11

Damodaran, Aswath, 47

Denton Machine Co., 102

Diageo (British company), 11–12

Dual-listed shares, 12

Enfield Electric, 80, 82–83

Enterprise value. See Levered value

Equilibrium expected rate of return, 1

Estimate(s)

country beta and FX exposure, 41

currency beta, 100

currency volatility, 75

global and local beta, 9

ICAPM currency risk premium, 61

ICAPM risk premium, 24

ICAPM statistical parameter, 23

ICAPM vs. GCAPM local market risk premium, 28

sovereign credit default swap yields and political risk premium, 45

U.S. market risk premium (MRP), 3

Expected rate of return. See Rate of return

Exxon, 9

Factor risk premiums, 21

FDI. See Foreign direct investment

Foreign asset, rate of return on, 4–5

Foreign currency approach, 57 vs. home currency, 86–87

Foreign currency index, 21, 23, 24, 107

global beta, 22

ICPAM, 20

risk premium for US dollar perspective, 22

Foreign direct investment (FDI), 93

FX equity exposure estimate, 10, 39, 42, 52

FX exposure

cash flow, 64, 69

country beta and, 41, 99

different currency directions, 68

foreign asset’s, 19, 66

to ICAPM FX Index, 107

method, 42

FX misvaluation, 86

FX operating (business) exposure. See FX operating exposure

FX operating exposure

operational hedging and beta, 98–103

project NPV and, 103–106

FX rate

intrinsic, 75–78

spot, 74

misvalued future, 81–83

misvalued time-0, 79–80

windfall cash-flow, 82–85

GCPAM. See Global CAPM

General Electric (GE), 7, 10

GlaxoSmithKline, 12

Global CAPM (GCAPM), 1, 5–8

versus ICAPM, 27–30

versus local CAPM, 8–10

Global equity beta, 6, 7

Global equity capitalization, 6

Global market index, 5

Global risk premium, 7

Grand Valley Resources Co., 39

Greenfield investment, 93

GTE Corporation, 35

Home bias, 6

Home currency approach, 57

foreign currency vs., 86–87

Houston Marine Electronics (HME) (sonar equipment), 68, 113

Australian production option, 115–117

United States production option, 117–118

Hurdle rate, 35

conversion to overseas currency, 58–64

operation-specific, 35–36

IBM, 9, 10

ICAPM. See International CAPM

International CAPM (ICAPM), 1, 14

cost of capital and, 24–27

factor risk premiums, 21

foreign currency index, 20

introduction to, 19–24

operational hedging and, 107–108

risk premium estimates, 24

risk-return expression, 26

standard risk coefficient form, 26–27

statistical parameter estimates, 23

traditional factor risk premium form, 24–25

versus GCPAM, 27–30

Incremental cash flow, 95–96

Investec (South Africa), 13

Investment’s cost of capital, 1

JP Morgan, 10

Lessard country beta method, 40

FX exposure estimates and, 41

Levered value, 37

Local betas, 9

Local market risk premium estimates, 28

London Tools Ltd., 108

Luna Instruments, 95–97

Market operations, emerging

political risk and, 44–49

Market price of risk, 3

Market risk premium, 2–3

Mergers and acquisitions (M&A), cross-border, 94–95

Mondi (South Africa/UK), 13

Multivariate regression, 25

NASDAQ, 11

New York Stock Exchange (NYSE), 10–11

Novartis (Switzerland), 11

Net present value (NPV), 57

FX operating exposure and, 103–106

New Zealand multinational company, 48–49

Norton Controls Co., 101

NPV. See Net present value

Offshoring, 98

Olympic Machine Tools, 95–97

Omberg Components Co., 100–101, 104

Operating cash flow conversion, expected, 65–68

Operational hedging

FX operating (business) exposure and, 98–103

ICPAM and, 107–108

Operation-specific risk and cost of capital, 36–37

Opportunity cost of capital, 1

Ordinary shares, 11

Overseas currency

hurdle rate conversion to, 58–64

Partial risk coefficients, 25

Political risk, 44–49

change in, 96–98

exposure, 46

premium, 44

Proxy firm approach

business beta and, 37–39

home country, 40–43

Rate of return

actual, 1

asset’s, 30–31

in British pounds, 4

expected, 1, 7, 36

on foreign asset, 4–5

NASDAQ stock’s, 4

required, 1, 7, 81–83, 117, 119, 122

Reed Elsevier (UK/Netherlands), 13

Reshoring, 98

Rio Tinto Group (Australia/UK), 13, 26

Royal Dutch Shell (U.K.), 11

Sanders Appliance Co., 66

Siegel’s paradox, 74

Siemens, 11

Sony, 13

Sovereign risk, 45

Sovereign yield spread, 45

Spot, FX rate

for time, expected, 74

misvalued future, 81–83

misvalued time-0, 79–80

Standard risk coefficients, 25–26

Stanwick Chemical Co., 66

Telefonos de Mexico, 11

Thompson Appliance Co., 104–106

Toronto-Dominion Bank, 79–80

Traditional factor risk premium form, 22–23

Unilever (UK/Netherlands), 13

Unlevered value, 37

US dollar

intrinsic business value in, 84

overvalued versus home currency, 80

versus currency C, 61

versus euro, 64

versus Mexican peso, 62

versus Swiss franc, 60, 62, 74

U.S. multinational power company, 48

Vienna Gear Plc., 65, 75–77

Vodaphone (U.K.), 11

WACC. See Weighted average cost of capital

Weighted average cost of capital (WACC), 36–37

vs. direct cost of capital, 37