DCF Myth 1: If you have a D(discount rate) and a CF (cash flow), you have a DCF!

Mod Note (Andy) - as the year comes to an end we're reposting the top discussions from 2015, this one ranks #35 and was originally posted 2/24/2015.

Earlier this year...

No Mas, No Mas! The Vale Chronicles (Continued)!

I have used Vale as an illustrative example in my applied corporate finance book, and as a global mining company, with Brazilian roots, it allows me to talk about how financial...

What's in a name? Of Umlauts, The Alphabet and World Peace!

As the title should forewarn you, this is a post that will meander from eating spots to basketball players to corporate name changes. So, if you get lost easily, you may want...

My Valuation Class: The Fall 2015 Model Preview

It is almost September and as the academic clock resets for a new year, I get ready to teach a new valuation class. With three hundred registered students, it is about as...

Storied Asset Sales: Valuing and Pricing "Trophy" Assets

Pearson PLC, the British publishing/education company, has been busy this summer, shedding itself of its ownership in two iconic media investments, the Financial Times and the...

Decoding Currency Risk: Pictures of Global Risk - Part IV

In my last three posts, I have looked at country risk, starting with measures of that risk and then moving on to valuing and pricing that risk . You may find it strange that I have not mentioned currency risk in any of these posts on country risk, but in this one, I hope to finish this series by looking first at how currency choices affect value and then at the dynamics of currency risk.

Currency Consistency

A fundamental tenet in valuation is that you have to match the currency in which you estimate your cash flows with the currency that you estimate the discount rate that you use to discount those cash flows. Stripped down to basics, the only reason that the currency in which you choose to do your analysis matters is that different currencies have different expected inflation rates embedded in them. Those differences in expected inflation affect both our estimates of expected cash flows and discount rates. When working with a high inflation currency, we should therefore expect to see higher discount rates and higher cash flows and with a lower inflation currency, both discount rates and cash flows will be lower. In fact, we could choose to remove inflation entirely out of the process by using real cash flows and a real discount rate.

Pricing Country Risk - Pictures of Global Risk - Part III

In my last two posts, I looked at country risk, starting with an examination of measures of country risk in this one and how to incorporate that risk into value in the following post. In this post, I want to look at an alternative way of dealing with country risk, especially in investing, which is to let the market price of country risk govern decisions.

Pricing Country Risk

If you are not a believer in discounted cash flow valuations, I understand, but you still have to consider differences in country risk in your investing strategies. If you use pricing multiples (PE, Price to Book, EV to EBITDA ) to determine how much you will pay for companies, you could assume that the levels of these multiples in a country already incorporate country risk. Thus, you are assuming that the PE ratios (or any other multiple) will be lower in riskier countries than in safer ones.

Valuing Country Risk: Pictures of Global Risk - Part II

In my last post , I looked at the determinants of country risk and attempts to measure that risk, by risk measurement services, ratings agencies and by markets. In this post,...

Groundhog day in Greece, Hijinks in Brazil and Market Chaos in China: Pictures of Global Risk - Part I

It’s been an eventful few weeks. Greece’s extended dance with default has left even seasoned players of the European game exhausted and hoping for a resolution one way or the...

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