Question

When evaluating international M & As, there are two methods that can be used to account for the foreign exchange risks, political-legal risks, and other risks. List and describe each method.

Answer 1

1)Discounted Cash flow Analysis:

It is process of calculating the present value of an investment's future cash flows in order to arrive at a current fair value for the investment.

DCF=CF1/(I+r)^1+CF2/(1+r)^2......CFN/(1+r)^n

To evaluate a M&A, first project the amount of operating cash flow the company is likely to produce in the years ahead. Most people estimate the cash flows for five or ten years in the future because it is nearly impossible to make a realistic estimate of cash flows for any lengthier amount of time. From there, determine how much those future cash flows are worth in today's dollars by discounting them back to the present at a rate sufficient to compensate for various prevailing risks.

DCF analysis is one of the most fundamental and pervasive concepts in finance, and one of its biggest advantages is that it accounts for the fact that money we receive today can be invested today, while money we have to wait for cannot. In other words, DCF accounts for the time value of money. As such, it provides an estimate of what we should spend today (e.g., what price we should pay) to have an investment worth a certain amount of money at a specific point in the future

2) Economic Value Added:

Economic value added (EVA) is the economic profit by the company in a given period. It measures the company’s financial performance based on the residual wealth calculated by deducting its cost of capital from its operating profit, adjusted for taxes on a cash basis.

So basically in International M&A'S this metric helps to evaluate the company taking in consideration various risks.