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The current Covid-19 crisis will impact the valuation of MNCs
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The current Covid-19 crisis will impact the valuation of MNCs. The value of a multinational firm should increase if the current Covid-19 crisis causes the expected cashflows from international operations to ____ and when foreign currencies denominating these cashflows are expected to ____. A. decrease; appreciate B. decrease; depreciate C. increase; appreciate D. increase; depreciate E. none of the options
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According to the international Fisher effect, if investors in all countries require the same real rate of return, the differential in nominal interest rates between any two countries: A. follows their exchange rate movement. B. is due to their inflation differentials. C. is zero. D. is constant over time. E. none of the above.
Expert Solution
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C. increase; appreciate
The current Covid-19 crisis will impact the valuation of MNCs. The value of a multinational firm should increase if the current Covid-19 crisis causes the expected cashflows from international operations to increase and when foreign currencies denominating these cashflows are expected to appreciate.
First of all, increasing cashflows from international operations are always beneficial. Now, if the foreign currency appreciates, it will result in more amount of local currency after conversion which is also beneficial. -
Fisher equation says that real interest rate= nominal interest rate- inflation rate.
Hence if real interest rate is same then the difference in nominal interest rate is due to the inflation rate differential.
Hence option b is correct
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