International Capital Budgeting and Valuation: Review and Proposed Approach

Abstract

For cross-border valuation to be consistent with the International CAPM (ICAPM), translating projected cash flows across currencies should account for a currency risk premium and the economic interaction between the cash flows and exchange rates. The conventional translation method, based on the traditional interest rate parity condition, ignores these items and is thus not consistent with the ICAPM. Using the constant perpetual growth model and empirical data from 12/31/1998 to 6/30/2020, this study illustrates the conventional translation method’s potentially substantial valuation error if risk and expected return are based on the ICAPM.