Increasingly, the world of corporate finance is becoming more global. Most of th
ID: 2783682 • Letter: I
Question
Increasingly, the world of corporate finance is becoming more global. Most of the tools and techniques examined in this course thus far can be employed in making corporate international financial decisions. Identify the unique factors that a firm's management team considers when making foreign investments. How do these contrast with the factors faced when making only domestic investments? In particular, analyze the key issues that arise in attempting to value foreign assets. What research problems, gaps in knowledge, and potential dissertation topics can you identify?
Explanation / Answer
In undertaking a foreign investment, the typical factors and risks that the firm considers are following:
On the contrary, domestic investments are mostly concerned with forecasting evolving domestic demand scenario, project cash flows and timelines and whether the returns generated are more than the hurdle rate. On meeting these lesser stringent requirements, a domestic investment usually sees the light of day. While a foreign investment needs far greater scrutiny because of higher element of country risk.
The key issues that arise in valuing foreign assets are:
The potential research topic which can be identified is an analysis of variability of country specific discount rate as per variations in the governance structure. Thus it can be used to identify if a totalitarian government has a higher discount rate than a democratic form.