Answer 17

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Read more on riskfree rates

You can value any company in any currency. The riskfree rate that you use will reflect the currency you decided to do the valuation in. For instance, you would use the U.S. treasury bond rate as your riskfree rate if you were valuing Nestle in U.S. dollars. If you decided to value Nestle in Swiss francs, you would use the 10-year Swiss franc government bond rate. If you shift to a Euro valuation of Nestle, your riskfree rate has to be a Euro riskfree rate. Since a dozen different European governments issue 10-year Euro bonds, you should go with the bond with the lowest interest rate since it is likely to be closest to being riskfree.

Extending this concept, your valuation should not be a function of which currency you decide to do the valuation in; a company should not go from being over valued in one currency to under valued in another currency at the same point in time. For this proposition to hold, though, your forecasts of future exchange rates (which you will need to convert your cashflows into a base currency) have to be consistent with your interest rate assumptions. Put simply, valuation will be invariant to currency choices only if you assume purchasing power parity.


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