Question

What are the country specific factors that should be considered when estimating the cash flow of a foreign target? Why?

Answer 1

There are many factors should considered when we are estimating the cashflow of foreign target. because without considering these factors we cant make an exact valuation of cashflow. Company cash flow estimation is very important because by only these estimation we can predict the future and we can make investment decision. So when we are making foreign targets we should take care of the countries specification and characteristics. Each country is differ from one another and all the policies and acts are different. so we should focus on these factors inorder to make a good estimation.By proper estimation only we can make a better decision. proper estimation is rely upon these different factors .This is why estimation is very needful.

TARGET SPECIF FACTORS

The following are the target specific factors which a MNC consider to estimate the cashflow of a foreign target

• Previous cashflow of the target - This is very important to look at the last year and previous cashflow of the foeign target. So by looking into the cashflow of previous year we can understand the position of the target and nature of the cash inflow and outflow. The initial and previous cashflows are the base for future cashflow. So it will hep for the future estimation.
• Managerial efficiency of target- When a firm decied tto acquire another then it should be noted the efficiency of the management of the other. Because only by proper management and governance the company can sustain well in an economy. So we should consider the management efficiency inorder to identify the capability of the company to compete and sustain with other company. Management efficiency can considerd as one of the major factor which we should focus.

Apart from these factors we should check the country specific factors for estimation purpose. That are described below

• Local economic condition of the target- we should take care about the countries economic condition and situation. The economic character will be diffrent for all the countries. There are developed countries and undevelped countries with developing countries. So the economic condition of all the countries will rely upon their development position and policies adpated by those countries. Strong economic countries have more efficient products and they can generate higher cashflows compared to others. Incase of emerging countries it will be very difficult to analyse the economy and market for a high period.
• Currency- The currency of the country and its value is very important. For example we should give 74 Indian Rs for 1 USD. Because the transactional value is very high. Dollar have more value.So we should aware about the future foreign exchange rates of currency. Also with that there is a need to findout the conversion of our currency with the other. Then only we can make a better estimation.
• Industry condition of the target- In each country the industrial preference are very much different. Some countries promote some industries and some other countries will support others. It will depends on their economy and other condition. So we should check which indusry is more preferable in particular target and the reason why it is more strong than others. Then only we can predict how the future cashflow will be for particular taget.
• Stockmarket condition in the target country- This is very important to analyse the stockmarket condition of the specific market because by looking into the stock market condition we can identify the growth of the company and the economy. if the stock market is performing very low it means the companies are not performing well so investing in those companies will not be great.
• Taxation policy- It is needed that to identifying the cashflow after tax.So the tax laws applicable in particular targets are used to findout the cash flow after tax and this will be used for findout the future estimation because the future cash flow which we are estimating should be done after deducting the taxes.

These are the factors should considered while estimating the cashflow of the foreign target.