Question

Nominal cash flows in a foreign currency should be discounted ____ Question 13 options: a) at...

Nominal cash flows in a foreign currency should be discounted ____

Question 13 options:

a) at a rate reflecting the parent’s opportunity cost of capital in the domestic currency
b) at a nominal discount rate in the foreign currency
c) at the cost of debt
d) at a weighted average cost of capital

Homework Answers

Answer #1

Nominal cash flows in a foreign currency should be discounted at the nominal discount rate in the foreign currency. The parent's opportunity cost of capital in the domestic currency does not appropriately reflect the exchange rate risks of the foreign currency and business risk of functioning in a foreign country. The cost of debt is appropriate only for debt cash flows and hence is incorrect. The weighted average cost of capital (assumed to be of the parent company) is inappropriate as the WACC reflects the parent company's risk level and not that of its foreign subsidiary.

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