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Hello Mr Moffat,
Suppose we are given a question in exam, a company is planing to acquire another company in a foreign country, so we are told to calculate whether it is worthwhile to invest it or not, lets say using Free Cash Flow method.
Kindly correct me if am wrong.
1. Calculate the foreign country Free Cash Flow.
2. Translate it to the parent currency.
3. Discount the project.But sir my main concern is at what rate should we discount it, using the subsidiary cost of capital or the parent?
Thanks
Soud SaeedUnless you are asked to use an APV approach, you would use a WACC using the asset beta of the foreign company in order to get an equity beta and hence a cost of equity and hence a cost of debt, using the gearing of the parent company (and the risk free and tax rate for the parent company).
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