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McKinsey/Valuation
148
Chapter: Chapter 23: Cross-Border Valuation
1. An analyst is using U.S. Generally Accepted Accounting Principles (GAAP) to estimate the
value of a subsidiary of a U.S. firm, and the country of the subsidiary is experiencing
hyperinflation. In this case, which of the following accounting techniques is recommended?
a) Current method.
b) Temporal method.
c) Autoregressive method.
d) Inflation-adjusted current method.
2. An analyst is estimating the value of a subsidiary using International Financial Reporting
Standards (IFRS), and the country of the subsidiary is experiencing moderate inflation. In this
case, which of the following accounting techniques is recommended?
a) Current method.
b) Temporal method.
c) Autoregressive method.
d) Inflation-adjusted current method.
3. Which of the following are reasons the forward-rate method is more complex than the spot-
rate method in estimating the value?
I. Incomplete data.
II. Extra calculations.
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III. The possibility of multiple solutions.
IV. The use of more than one currency in the estimation process.
a) I and II only.
b) I and IV only.
c) II and III only.
d) III and IV only.
4. Which of the following are categories of assumptions needed when making projections of
and discounting cash flows in different currencies?
I. Inflation assumptions.
II. Cash flow projections.
III. Forward exchange rates.
a) I and II.
b) I and III.
c) II and III.
d) I, II, and III.
5. Which of the following are issues to address when analyzing foreign companies?
I. Making forecasts in foreign and domestic currencies.
II. Estimating the cost of capital in a foreign currency.
III. Incorporating foreign-currency risk in valuations.
IV. Using translated foreign-currency financial statements.
a) I and II only.
b) I, II, and IV only.
c) II and III only.
d) I, II, III, and IV.
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6. In the next two years, the expected inflation rates are 1 percent and 2 percent, respectively,
and the real interest rates are expected to be 4 percent and 4 percent, respectively. Using this
information, calculate the two-year interest rate yield as of now.
a) 1.88 percent.
b) 2.74 percent.
c) 4.94 percent.
d) 5.56 percent.
7. In the process of estimating the value of foreign companies, with respect to including an
additional risk premium in the discount rate to adjust for perceived currency risk, which of the
following are true?
I. The risk premiums would probably be relatively small.
II. Currency risk premiums are the reason shareholders would benefit if managers increased
their level of currency management.
III. Currency risk premiums are the reason a global application of the CAPM is not
recommended.
IV. It is likely that currency risk premiums are included in the spot and/or forward exchange
rates used to translate currencies.
a) I and II only.
b) I and IV only.
c) II and III only.
d) III and IV only.
8. The cost of capital is best estimated from the perspective of a global investor and using both
the market risk premium and beta measured against a global market portfolio and not against a
local (foreign or domestic) market portfolio.
9. Market data across countries do show differences in realized premiums, and this is mainly
because the markets have distinct systematic risk factors.
10. It is generally accepted practice to make ad hoc adjustments to the discount rate to reflect
political risk, foreign-investment risk, or foreign-currency risk.
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Short Answer
11. List and describe the two methods for converting forecasted cash flows from one currency
into another.
