international valuation & bankruptie

Question 1

do we value fcf when earned or when rehemited, + 2 exeption

Answer 1

we value the FCF when earned as shareholders have a claim on them. if there is a high risk of diversion/corruption we can value them when re-emitted(ex; dividend), but it is essentially the same as valuing fcf earned net of diversion.

if domestic taxes are applied on the reemitted cash can affect the when-earned valuation because it does not account for taxes

Question 2

What are the main differences between the worldwide tax approach and the territorial tax approach?

Answer 2

Back (Answer):
Worldwide Tax Approach:

Taxes a company’s global income, regardless of where it is earned.
Foreign income is typically taxed when repatriated (brought back home), with credits for taxes paid abroad to avoid double taxation.
Encourages firms to defer repatriation to minimize domestic tax liabilities.
Territorial Tax Approach:

Taxes a company only on the income earned within the home country.
Foreign income is exempt from domestic taxes, simplifying tax obligations.
Encourages free flow of earnings across borders without tax deferral strategies.

Question 3

what tax rate to use with a worldwide approach with only tax credit to avoid double taxation

Answer 3

due to tax credit: using the highest between foreign/domestic tax rate

but the taxation is often only applied when money is sent back home, thus if money is never sent back home use the foreign tax rate

Question 4

how to account for tax holidays in foreign contry in the worldwide approach

Answer 4

with tax sparing credit: the domestic tax rate would be the difference between what the tax rate would be if no tax holiday. thus; total tax rate = domestic tr - foreign tr (without tax holiday)

without tax credit sparing; use domestic tax rate

Question 5

what rate to use in the territorial approach

Answer 5

use the foreign tax rate only

Question 6

Why must the currency denomination of cash flows align with the currency denomination of the discount rate when computing present value?

Answer 6

Back (Answer):
Principle: The currency of cash flows must match the currency of the discount rate used for present value calculations.

Reason:

Different currencies are subject to different inflation rates, which affect both cash flows and the discount rate.
Aligning the denominations ensures that the discount rate reflects the inflation and risk characteristics of the cash flows, maintaining accuracy in valuation.

Question 7

when and how to use the international discount rate on equity

Answer 7

when:
– For valuation in the context of integrated capital markets. (no barrier to invest)
– When investors are globally diversified.

can use it even if markets are not integrated as long as investor are globally diversified

how: with CAPM using international portfolio as reference for betta

Question 8

difference in discount rate between global and domestic

Answer 8

as the domestic index does not truly represent just the systemic risk, as it is exposed to country risk, the global discount discount rate is often lower. wish means lower cost of capital and more opportunity for positive npv

Question 9

What are the main components and drivers of variance in returns from foreign investments?

Answer 9

Back (Answer):
Components of Returns:

Foreign Market Return (
𝑟
foreign
r
foreign
​
): Driven by the performance of the foreign investment.
Exchange Rate Return (
𝑟
ER
r
ER
​
): Impact of currency movements.
Interaction Term: Combined effect of market and exchange rate movements.
Key Drivers of Variance:

Market Return Variance: Dominates in most cases (e.g., 90%+ in Canada, France).
Exchange Rate Variance: Smaller but significant in volatile currencies (e.g., Germany 19.4%).
Interaction Effects: Amplify or dampen returns depending on the country.
Takeaway: Market returns are the primary driver of total variance, but exchange rates and their interactions can meaningfully influence short-term results. Over time, PPP stabilizes exchange rate impacts.

Question 10

How do you estimate currency betas, and what is a realized excess currency return?

.

Answer 10

Estimating Currency Betas:

Convert project/firm returns into the home currency (e.g., USD).
Regress the converted returns on realized excess currency returns.
The regression coefficient is the currency beta, measuring sensitivity to exchange rate changes.
Realized Excess Currency Return:

The change in the exchange rate relative to expectations (e.g., USD/EUR).
Practical Notes:

Firms may have multiple currency exposures.
Focus on major currencies or those directly involved in valuation to simplify analysis.

Question 11

What are the key considerations for international valuation and currency premia?

Answer 11

Back (Answer):
Key Considerations for International Valuation:

Decide on the currency for the analysis.
Align the currency of cash flows with the currency of the discount rate.
Be cautious with international taxes.
Use earned cash flows rather than remitted cash flows unless remittance has clear benefits.
Currency Premia:

The sign and size of the premia depend on trade positions, capital flow imbalances, and hedging needs.
Over long horizons, premia are often excluded as PPP (Purchasing Power Parity) tends to stabilize exchange rates.

Question 12

Front (Question):
What are the pros and cons of private restructuring vs. bankruptcy?

Answer 12

Back (Answer):
Private Restructuring
Pros:

Less costly and faster.
No court intervention.
Shareholders and creditors often “do better.”
Suitable for firms with:
Intangible assets.
Simpler liability structures.
Cons:

Requires agreement from all key stakeholders.
Tax disadvantages:
Debt forgiveness may be taxable.
Net Operating Losses (NOL) may be lost or restricted.
Bankruptcy
Pros:

Court protections:
DIP (Debtor-in-Possession) financing.
Automatic stay (stops creditor claims temporarily).
Exclusivity for management to propose plans.
Fewer creditor approvals needed (risk of “cram-down” helps enforce plans).
Tax benefits:
NOLs are preserved.
Debt forgiveness is not taxable.
Cons:

Costly and time-consuming.
Involves court oversight and possible loss of control.
Greater public scrutiny.

Question 13

What are the benefits of a pre-packaged bankruptcy?

Answer 13

Back (Answer):
Streamlined Process:

A reorganization plan is filed together with the bankruptcy petition, reducing delays.
Tax and Voting Benefits:

Benefits from favorable tax and voting rules compared to private workouts.
Cost and Time Efficiency:

Less costly and faster than traditional court-supervised restructurings.
Average duration: approximately 2 months.
Typical Candidate:

Ideal for LBO (Leveraged Buyout) firms due to prearranged creditor agreements.