Chapter - Gnternational financial

Management ( IFM)

Should be accepted ?
1. a
project or not

NPV (Net Present Value)

D use .

Accept
gf NPV → the :

NDU
Reject
→ -
ne :

i
) How to calculate Nov ?
Npv =
Pva -

pvco Discount rate

WA
=
CC

v v

Cash
Sunflower =

Project Cfs ,
Cash
outflows
=
Gnitial Investment
Sale FA at
subsidy ,
of ion FA ,
WC ,
any
other cash

the end release WC

outflow
of
.

)
ii Cal of faff ( free
. G-
for firm) - Same as Corporate Valuation

Step I → Calculate NOPAT

Sales ✗✗

c- 1
Exp ( other than deph & amortization ) ( xx)
operating
.

EBITDA XX

f) Dep "
& amortization (xx )

EBIT ✗✗

Tex ☒
NOPAT

XXI
G¥lt ! While Cal .
f- EFF we do not subtract Gnteyt .

Here
directly calculated
tax EBIT without
i. on
is

subtracting interest .

1 Jatin A.Nagpal
 Step 2 → Calculate f- off
from NOPDT

NO PAT XX

4) Dep ( & any other Exp ) ✗✗

"
non -

cash

A Capital Expenditure (xx)

(xx)
working Capital
Rise in

4) Release ✗✗
of
" ' '

Sale asset ( Net

of text
of any capital
It) ✗✗

f- off :
XX
=

Notts

Gh¥ while Calculating faff we do not consider

any
amount

received or
paid to providers of LT Capital such as

Equity Stef
0
Debt / loan •

Preference SHS
( Thats Gnterest earlier)
why was not considered .

already
2. &
Any
cost which is incurred w.at . a new
product
such

cost
as

etc
Red

is
exp
known
.

already incurred
"

odrrelevaut
on that
product
Sunk cost
"
,
designing
ie
as or
they
. .

do not
play any
role in
future decision
making
.

Gagnon such

costs
" "

3. Even
atlocated fixed costs shall not be considered .

( But additional / new fixed cost will be considered )

4. is
Opportunity cost considered .

Rental
Eg machinery currently rented out
Zlacpa
:
income
=
.
.

it will be internal
Now used in an
project .

Rental ( ) 4=2 Lac

foregone
:
income
=

opportunity cost
-

pa .

÷
Gf Then Cal
5. NP is → to nopal
given
NO Post =
NP + Gut G- tax)

2 Jatin A.Nagpal
 Calculated
iii
) NPV
may
be in Home
currency
or fc terms

HOME CURRENCY APPROACH

•
Connect all Cash flows in HC terms .

Generally ques will

provide Inflation data or Gnterest dates
of 2 currencies .

( when
we will estimate
forward seats
using
PPPT
inflation
given ) given)
GRPT ( when interest rates
is or
by using
are .

°
Calculate NPV above Cfs (which in HC terms )
using
are .

Discount HC discount rate

for Nov
rate →

FC approach
Cal terms
Nov in
of FC
only
°
. .

°
Use FC discount rate for NPV .

spotraltm.io
Then convert that NPV HC terms
using
•
in

) Discount rate WACC =

ke .
We + Kd wd .

8wp!= Discount rates

for different countries will be
different .

Ex Rf Rf Gondia
1 US
31 5%
=
:
in .
in =
.

A V8 Gaveston wants to establish a theme

park in India .

The investor
already runs theme
packs in US . Find req return .

Gordian his
from project if req return in US 9 -1
=
. .
.

Dns :
=

✗ Simple addition
C
2 methods
>
multiplication
Rf + Risk
premium
=
Req .
return (it of ) ( it Rp ) =
CARR)

3-1 .
+ RP
=

9-1 .
RP =
61 .
1.03 ✗ ( ItRp ) =
I -09

Rp =

5.825%
:
Reg .
return =
E Rift RP
Gndie
:
Gondia 5 -1
6•= RR 1.05 ✗ 1.05825
-

= =
in .

É_a
=

3 Jatin A.Nagpal
 § v .8mpNoñ__ → 9m this Chapter we will always use

multiplication method .

" " "

The Simple &

"
2. names addition multiplicative are

informal names
for student retention . These are not

standard $0 do not
industry names use in exam
.
.

4 .
The rate calculated above as
11.1165-1 .
is known as
"

Risk CRADR)
"

adjusted discount rate

-

3.
9f in the above
eg .
→ we wanted to discount US Cfs .

lie .
in Sls ) them we would have use 91 .
discount rate .

Similarly ,
Indian discount rate
of 11.1165-1 . ( Cal .

using
multiplication method) would have used to discount Eofs

Discount Twist in
rate
story
v. -

Twist 1 :
WACC not
given .

Ex 2 : Calculate WACC
of Logi Ltd Details G. ÷
.

of is

Rf Gf Run 14% Beta Co 1.4

of
= = =

,
.
.

°
Gnterest on debt =
to
-1 .
.
Tox seat =

201 .
.
Wd =

401
ke Rft (Rm Rf) ✗ Beta
= -

☐n
=

Gf .
+ (14-6)×1.4 =

17.2.1 .

Kd =
Gnterest 11 -

tax rate)

lot (1-0.2) 81
=
.
= .

WACC
=
He We t Kd we
=
17.2×0.6 1- 8×0-4 =

13--5-21

4 Jatin A.Nagpal
 Twist Level 2
Equity Beta
:
is not in
question
given .

But umleueved Beta is

given .

Levered 1
Equity ) Beta =
Bu
/ It
¥4
-

tax)
)

Ex⇐ Let Beta

us
say
im above
eg
2 ,
Equity is not
given .

But unburied Beta is 1.2

given as .

Equity Beta or Levered Beta (BL) = Bu

( I +
¥11 -
text
]
1.211+0%-11-021)
=

BL =
1.84
-

°
ke =
Rf + (Rm Rf)-
✗ Beta
=

6.1 . + ( 14.1 -6-1

. . ) ✗ 1-84 =
20-72 f.
=

°
WACC
=
Ke we + kdwd
=
20.72 ✗ 0.6 + 8×0.4
15¥21
=
.

Using Proxy firm

Twist LEVEL 3 to Cal Beta
Equity
:
.

# STEPS

1 Beta , Public G. will be Use it Cal Beta

.

of given
. to .

of
the

sector in which the operates

company
.

2 But hence calculate BL

easily
Now have the
we can
of
.

required Company
.

5 Jatin A.Nagpal
ELI : find required return
of private Co engaged in the

manufacturing
a .

DIE I :4
of tyres 20-1 Tax rate = =
.
. .

similar
A
@nÉÉI5 Gñ .
DIE ratio =
2.2 : I

applicable of public Kompany

& tax rate =

30-1 .

Run =
12% Rf & =

31 .

Levered Beta
unburied Public )
Dn Calculating Beta
using proxy firm
lie . Co .

Be Do
fit ¥11 text
)
=
-

Bu
f l
2,2-(1-0.31) Do =
1.55 =
t 0.61024

Bu to Cal Bc
using
°
.

Bc Bu
f E- CI tax )
)
=
it -

/ f- I
1- 0.2 )
) 0.73221£
= =
0.61024 It

Levered Beta Co
Beta
Equity 0.732288
:

of
=
or
=

Return out to Can CDDM) =

Rft (Rm Rf ) Beta
of
per
-

=
3ft (Rf .
-3 f.) ✗ 0.732211
9.59-1
=
.

6 Jatin A.Nagpal
 & GVFLATION COMES INTO PICTURE
Cash
flows can be

Real CFS
-
> Nominals
discount Discount
Real
using using
discount rate Nominal discount rate

method will be used

Again multiplicative here
# : -

It real rate ) ( ltenflation premium) =

( it Nominal rate )

¥5 Yeas Real af find NPV the

required return
if
:

0 1200) in Nominal terms is 121 pa

.
.

108
1
odnflation eat 4-1
=

pa
.

2 120
Ans :
=
method 1 :

Preferred
Convert Real of to Nominal Gfs .

Year Real CFA Nominal CFS

} Simply
0 200 ( Loo)
'

I 108 108×(1-04) =
112.32 Caldron
2 120 120×4.04)②- =
129.792

(200)
12,4T¥
Nov +
112,7¥
=
+

+3.75€
=

¥:9f Nothing
is mentioned
"
in
ques ,
then assume cash
flows
Nominally
"

to be

7 Jatin A.Nagpal
 method 2 : Convert nominal rate to real rate & use

real real Cfs

rate to
directly discount .

It rate ) At Nominal rate )

real ( it
Inflation )
=

(It real rate ) 1.04 =

1.12

real rate
7.6923%
=

(200)
lost
°
Nov
=
t + 120
.
07-6923 (1.07692312

+3s5_

Maha Gnp .
Note : Rule of Consistency
Always make sure that discount rate consistent
°
is
your
with the cask
flows .

Cfs Discount rate

Real Gfs Real discount ralt

Nominal Gfs Nominal discount rate

Home
Currency Gfs HC discount halt

f- C Gfs FC discount rate

* Gf only required rate

of
return is
given in
ques ,
but

is about whether it is HC rate FC rate

nothing given or ,

real nominal
or →
"
Always assume
"
Nominal rate Investor 's
of
Hc

Ex : Indian investor wants to invest in Sri Lanka .

( Nominal rate)
"

Req
"

. return =

15% .
This is HC rate .

8 Jatin A.Nagpal
 £ HANDLING r KE in -
house
inane
for
Recall Price rule
of picking
rates
tag
-

Cad 0.735$ 0.738$ Cad

E± I
price tag of
= - -

1$ 1- Cad
¥g
Cad price tag of $
= -
-

0.738

Now
if you buying sellingCadCad → Just
focus
°
are or

Price
" "

1st
on quote ie .

tag of
Gf you selling $ →
focus
°

are
buying or on 2nd
quote
ie Price $
tag of
-
.

i Sell $20000 .

Relevant Equation Cad

1$
¥g Cad
=
I -

0.738

20000 ✗ 1- / Bid rate ) (Ask rate )

0.738
=
Cad 27100 lepprox)

) Buy
Ii 15000 Cad .

Relevant Equation → Cad =

0.735$ -

0.738$
( Bid rate) (Dsk rate)

15000×0.738

N_ Purchasing Power
Parity Theory Interest rate
parity theory
forward Kali
is
= SR (I
Inflation is)
+ forward =
SR ( It Gut rated)
( ltosuflation B) ( I + Stratos)
rate
of B
9 Jatin A.Nagpal
 us if =
8-1 .
9-die * = ""

④ Erp ) IITRP)
= It
regret
1.12×(1-154)
= 1.14
It Rp =
1.017857
=

Hc return lie FE ) $8 req return

req . .
.

An

9.9-1 .

10 Jatin A.Nagpal
Subsy (Salian) É us

tyrforwardrae

no
$9731562.5

net Cost = $ 5

Sell =
$ 1.20 crore
-
Boa
19 Jatin A.Nagpal
 =

90000×1.43
=

(500009 (16-50) ( 2420/(3327-5)

1200000) 70000 ¥00246960

1F=6dR_ads_

11 Jatin A.Nagpal
ARE ) Calculation of
i
exchange rate as
per
PPPT
forward I SIR It Rand
rate
of inflation
=

It E-
inflation

=
7.6364
6✗,Y→
Year I IF =

Year 2 IF =
6×1.402 =
9.7190
(1.1072
>
Year 3 IF =
6×(1-40) =
12.3696
4. 1)
3

)
Ii
Calculating Nominal Gts
Yr
Year 0 Yet Yee 2 3

a. Real INR Cfs ( 50000) ( 1500) (2000) (2500)

b. Nominal INR Cfs ( 50000 ) ( 1650) ( 2420) (3327--5)
( + Eimf )
"

Real Gfs ✗ .
-

1500×1-1 12000×1.12 2500×1-13

C. Real Rond Cfs ( 2000007 50000 70000 90000

d. Nominal Rand Cfs (2000007 70000 137200 246960
50000×1.4 70000×1.4290000×1.43
e.
Equivalent INR :
133,333 ) 9167 14117 19965
70000×1 2469€
200000×61 7.6364 ¥¥÷0 12 -3696

f. Total INR Cf ( Nominal) (83333) 7517 11697 16637.5

183,3337+7,52-17 ¥2 ¢-11,177)
✗
11,62927-1-16637.5
NPV
=
1- =

0.20 mm

NPV is we i.

Project should not be accepted

-

. .

12 Jatin A.Nagpal
 i¥y :
1.5mn ✗ (80-40) =
$6om⇐

v0

,AftuJ#au
¥0 5¥ -1¥ :
-

☐ Sale :
5mn ✗ 80$ 400

variable :
5mn ✗ 20$ (100)
( 30)
Ddd .

fixed cost :

Depn ( too)
cost ¥
opportunity
:

PBT :
110
PDT : PBT ✗ (1- t) 71€
(t) ⑥ epn too
CF per : $ 17¥
13 Jatin A.Nagpal

Fsea
 $ million

A± Initial Gnuestwnent Gnuestrnent

fixed Cap 500
: =
in .

(f) Gnoeease in WC 150-15)* 35_

535_

Calculation Annual Gfs $ Million

#
of
°
Annual revenue
:
5×80 400

variable cost :
5×20 ( too)
Additional 130)
fixed cost
f) Depreciation 500g
: ( too)

↳ 1.5×(80-40) 160)
opportunity cost :

( current CF
by Exports) -

EBT 110

↳ Taxes @ 35-1 .
(38-5)
EAT 71.5

4) Depn :
too
Cash
flow f. 171€
=
a

for b-
years

#
Calculating NPV f- Pva Pvco)
-

°
PU Cfs
of of
5
years
: 171.5 ✗ PVAF (12-1,5) 618.219
°
Pv WC released at end 5th :
35_ 19.86
of of yr
1. 125

680.08
C- I Pvco :
(535 )
Npv 103.08

14 Jatin A.Nagpal
 Nominal of
-

→ IF
Cash flames
rate
Nominal discount
E

Calculation
of forward rates Yoel Yrz Yr3
Dn
1.6×(1-09)<1.6×4.0973
"

FR F ☒ RIITNC
inflation) t.co?o1g.09-
=

of C. 0852 (I. of )3
(+ ⇐ inflation )
"

1- 615 1.630 1.645

⇐ in million)
calculation Yrz Yes
of Cfpa
Yro Yr 1

a- CF in INR 0 2.869 4.2 4.6

b. CF in NC ( 25 ) 2.6 3.8 4. I

c. Equivalent of im I (15-625) 1.6099 2.3313 2.4924

25×41.6 2.6×4.615 3.811%16304.1×1%645

d. Total CF ion I late) ( 15.625) 4.4789 6.5313 7.0924

15 Jatin A.Nagpal
 Calculating Puce
Npv =
NPV
-

PVCO
- Npv =
(15-625)+4.4789 + 6.5313 1- 7.0924
Fog 1. 092 1.093
= -
FO 542
-
Million

edntermal IMIRR)
#
Calculating modified rate
of
return

Yea I value @ 3rd end

year
I 4.4789 4.4789×1.092=5.3214
6.5313
'
2 6.5313 ✗ 1.09 =
7.119

3 7.0924 7.0924 ✗ 1.09° =

7.0924
19.5.33

MIRR → rate at which Pvco =

Pva

15.625 =
19.533
(+ IRR)3

>
(+ )
1,9-5%323-5
IRR = =
1.250112

MIRR =
(1.250/12)%-1
MIRR
7.7251
=
.

16 Jatin A.Nagpal
 Concept ( MIRR) &
#
of modified IRR modified NPV

when reinvestment rate is

specifically
°

given
or

specifically asks
for MIRR M NPV
°
or
ques
-
.

here we will re -
invest all intermediate cash
flows from
till the
a
project end
of the
project .

Ex Yea G- FV @ end
of yr3
:

1 250 250×1.082 =
291-6
'
2 300 300 ✗ 1.08
=
324
3 400 400 ✗ 1.080 =4O0_
1015.6
5800 Reinvestment 81
Amount invested
today rate =
=
. .
.

)
i Calculate NPV & NPV required 7-1
if rate
M -
=
.
.

ii Calculate IRR & M -

IRR
of
the
project .

8¥
Pv CF at Duco
of of project
the end
=
NPV
-

M
☐_ -

800
1%5%-3
=
-

=
29.032
=

Ii ) The DV CF ( at
'

IRR which
of
=
m -

rate at the the

project) Duco
=
end
of the

's
'¥÷rp
800 err
=(g¥) -1
=

IRR
8.279.1
=
.

17 Jatin A.Nagpal
 -

-
=

IGDR → $7 -5×60
20-1×100--2=201 -

€950110.98
Faut

Avis :
GDR issued ✗ ( I -

flotation cost ) =
Net amount raised

GDR issue (1-0.02) =

$10 million

Required issue size

=
to =
$10.204 Million
0.98

i ) 9ss.ve price GDR 2×250 ✗ 0.9 5-450

of
= =

$ $7.5
4¥
" " = =
"
"
in

of
ADRs required to be issued
$¥?g4_ 1.3605€
= =
No . n

ii Calculating cost
of GDR
Dividend per GDR
=

(100×2)×20-1 .
=
€40

Value DPS Cost GDR

where ke
of
= =
,
,

ke -

450×0.98 =
40 ke =

f.
ke -
0.12

18 Jatin A.Nagpal