Product Overview

A privately held U.S. plumbing parts manufacturer is negotiating the purchase of a Brazilian plumbing manufacturer specializing in water conservation. The case provides sufficient information to value this cross-border acquisition and includes a brief summary of valuation techniques in this context. A particularly rich discussion arises from two points: A forecast of exchange rates from a forecasting company differs from forecasts based on inflation, and two methods are suggested for dealing with country risk (sovereign spread and scenario analysis). A teaching note and instructor and student spreadsheets are available to accompany this case.

Learning Objectives

Become acquainted with the standard valuation approaches used for cross-border transactions; forecast future spot exchange rates, convert future cash flows denominated in a foreign currency to equivalent cash flows in the domestic currency, and use a domestic currency discount rate to value the cash flows; and convert a domestic discount rate to a foreign currency discount rate based on interest differentials, use this foreign rate to discount foreign currency cash flows, and convert the resulting foreign currency value to dollars at the current spot rate. The case also allows students to develop the skills needed to address political risks and understand how those risks affect a valuation.