International Financial Management

On October 13, 2015, SABMiller, the London-listed international beer giant, agreed to be purchased by AB InBev, the Belgian-listed international beer giant, for £69 billion ($106 billion) in what would be the third largest merger in history. How did AB InBev determine that this was the right amount to pay? Why did SABMiller accept the offer? Answering these questions requires a methodology to value SABMiller with or without the merger. This chapter explains one way in which corporations assess such future profitability. Our methodology is adjusted net present value (ANPV) analysis. The ANPV methodology can be used in capital budgeting when corporations make investment decisions and determine the valuations of international projects.

We also find the ANPV methodology particularly useful when valuing a project done by a foreign subsidiary. We use a multistep approach that begins with the discounted cash flows to the subsidiary and then makes the adjustments necessary to determine whether the project is worthwhile from the parent corporation's point of view. The first sections of this chapter describe why the ANPV approach provides correct international valuations. We then apply the ANPV approach to an extended case involving International Wood Products Inc., a company that has seen a substantial increase in its exports to Europe and consequently must decide whether to locate a production subsidiary in Spain or expand its operations in New Hampshire.

An Overview of Adjusted Net Present Value

This section provides an overview of valuation done with ANPV analysis. This is not the only way to do valuations or capital budgeting. Chapter 16 compares alternative methods, such as the weighted average cost of capital (WACC) method and the flowto- equity (FTE) method. Although each method can be correctly applied to answer the same capital budgeting question, some methods are easier to apply in different situations. Our view is that the ANPV approach lends itself to international applications most easily.

The basic principle of capital budgeting is that all projects with positive ANPVs should be accepted. For mutually exclusive projects, the one with the highest ANPV should be undertaken. Modern financial theory develops the ANPV of a project in several steps, as discussed in the following subsections.