Chapter 18
Multinational Capital Budgeting and
Cross-Border Acquisitions
◼ Learning Objectives
1. Explore the complexities of budgeting for a foreign project
2. Illustrate multinational capital budgeting with the case of Cemex entering Indonesia
3. Describe the use of real option analysis
4. Examine the use of project finance to fund and evaluate large global projects
5. Introduce the principles of cross-border mergers and acquisitions
◼ Chapter Outline
I. Complexities of Budgeting for a Foreign Project
A. Cash Flows
B. Management Expectations
C. Project versus Parent Valuation
II. Illustrative Case: Cemex Enters Indonesia
A. Overview
Capital Investment
Financing
Revenues
Costs
B. Project Viewpoint Capital Budget
C. Parent Viewpoint Capital Budget
D. Sensitivity Analysis: Project Viewpoint
Political Risk
Foreign Exchange Risk
Other Sensitivity Variables
E. Sensitivity Analysis: Parent Viewpoint Measurement
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3. Project Versus Parent Valuation. Why should a foreign project be evaluated both from a
project and parent viewpoint?
4. Viewpoint and NPV. Which viewpoint, project or parent, gives results closer to the
traditional meaning of net present value in capital budgeting?
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5. Viewpoint and Consolidated Earnings. Which viewpoint gives results closer to the effect
on consolidated earnings per share?
6. Operating and Financing Cash Flows. Capital projects provide both operating cash flows
and financial cash flows. Why are operating cash flows preferred for domestic capital
budgeting but financial cash flows given major consideration in international projects?
7. Risk-Adjusted Return. Should the anticipated internal rate of return (IRR) for a proposed
foreign project be compared to (a) alternative home country proposals, (b) returns earned
by local companies in the same industry and/or risk class, or (c) both? Justify your answer.
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8. Blocked Cash Flows. In the evaluation of a potential foreign investment, how should a
multinational firm evaluate cash flows in the host foreign country that are blocked from
being repatriated to the firm’s home country?
9. Host Country Inflation. How should an MNE factor host country inflation into its
evaluation of an investment proposal?
10. Cost of Equity. A foreign subsidiary does not have an independent cost of capital.
However, in order to estimate the discount rate for a comparable host-country firm, the
analyst should try to calculate a hypothetical cost of capital. How is this done?
11. Viewpoint Cash Flows. What are the differences in the cash flows used in a project point
of view analysis and a parent point of view analysis?
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12. Foreign Exchange Risk and Capital Budgeting. How is foreign exchange risk sensitivity
factored into the capital budgeting analysis of a foreign project?
13. Expropriation Risk. How is expropriation risk factored into the capital budgeting analysis
of a foreign project?
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14. Real Option Analysis. What is real option analysis? How is it a better method of making
investment decisions than traditional capital budgeting analysis?
15. M&A Business Drivers. What are the primary driving forces that motivate cross-border
mergers and acquisitions?
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16. Three Stages of Cross-Border Acquisitions. What are the three stages of a cross-border
acquisition? What are the core financial elements integral to each stage?
17. Currency Risks in Cross-Border Acquisitions. What are the currency risks that arise in
the process of making a cross-border acquisition?
18. Contingent Currency Exposure. What are the largest contingent currency exposures that
arise in the process of pursuing and executing a cross-border acquisition?