The valuation of companies and subsidiaries in foreign countries has become easier.
Four issues need to be considered when analyzing foreign companies:
- making forecasts in foreign and domestic currencies,
- estimating the cost of capital in a foreign currency
- incorporating foreign-currency risk in valuations, and
- using translated foreign-currency financial statements
For a given company, forecast the cash flows in the most relevant currency.
Use either the spot-rate method or the forward-rate method to convert the value of the cash flows into that of the parent company.
It is important to use consistent monetary assumptions in the process (e.g., concerning inflation and interest rates).
When estimating the cost of capital, use the equity premium from a global portfolio without an adjustment for currency risk.
When translating statements into another currency, there are three choices:
- the current method,
- the temporal method, and,
- the inflation-adjusted current method.
Using, the current method is the most appropriate approach.