This chapter has focused primarily on the example of valuing the English subsidiary of a U.S. parent multinational corporation. After analyzing historical performance, we forecasted all cash flow, wherever it occurred, in the most relevant currency. Next, this cash flow was translated year-by-year into pounds, the subsidiary's currency, by using forecasts of the future spot foreign exchange rates. Once all free cash flow was stated in pounds, it was discounted at the weighted average cost of capital for the subsidiary. The resulting pound value of the company was then converted to dollars at the spot exchange rate.

Along the way, we covered a number of difficult issues: the need to understand foreign (and U.S.) accounting standards, the transfer-pricing problem, forecasting forward foreign exchange rates, and understanding the effect of hedging on value.

Valuation Outside the United States

Does everything that we have described about valuation apply outside the United States? Absolutely. This does not mean that all capital markets are as efficient as the U.S. market or that all managers outside the United States are as focused on shareholder value creation. But our ideas about valuation can help managers everywhere make better strategic and financial decisions.

In Chapter 5, we showed that in the United States, the market value of companies supports the discounted cash flow approach. The evidence from other countries also lends credence to the DCF method. Exhibit 18.1 shows how the market values of European companies relate to ROIC and growth. Companies with higher ROIC have larger market-to-capital

Exhibit 18.1 Relationship between Market Values, ROIC, and Growth in Europe

ratios. Companies that are growing faster have higher market-to-capital ratios when ROIC exceeds WACC.

In this chapter, we describe some of the differences in valuation analysis outside the United States. These differences fall into three categories: accounting, taxes, and cost of capital. The information in this chapter is primarily relevant for Europe, Japan, Canada, and other developed countries. Chapter 19 deals with special valuation issues in emerging markets.

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