Groupe Ariel S.A.: Parity Conditions and Cross-Border Valuation (Brief Case). Groupe Ariel. BZ. Beth Zimmerman. Updated 18 Parity Conditions and Cross- Border Valuation. Groupe Ariel S.A.. About Groupe Ariel. How should Groupe Ariel finance the project? In pesos Will this affect your conclusions on whether Groupe Ariel should approve the project?.
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Parity conditions and cross-border valuation.
Groupe Ariel S.A.: Parity Conditions and Cross-Border Valuation
Ariel requires a DCF analysis and an estimate of NPV for capital expenditures of this size in its newer foreign subsidiaries. One of the questions confronting the analyst at headquarters in Mulhouse, France, is whether to perform this analysis in Euros or pesos. Need to generate a peso discount rate. When parity conditions hold, approaches 1 and 2 give the same Euro NPV. When parity does not hold, the two approaches can give very different answers and may even cause managers at headquarters and in the subsidiary to disagree about whether the project should be undertaken.
It states that the cost of living in s.a.pariyy countries is equal and exchange rates adjust to offset inflation differentials across countries. If PPP holds, If purchasing power parity is expected to hold, then the best prediction for the one-period spot rate should be. This is because the new equipment would have a useful life of 10 years.
The old equipment is sold in year 0 forpesos, but the book value ispesos. Ggroupe generates a loss of 75, pesos. They will give the same answer if the basic parity conditions are expected to hold. After-tax cost savings are affected TN exhibit 4. Total peso cash flows TN exhibit 5: The row of future exchange rates shows no change in currency values because inflation is the same in both countries.
A case study Groupe Ariel S.A.: Parity conditions and cross-border valuation.
Suppose Ariel expects a real depreciation of the peso in the near term in years 1 and followed by parity crooss-border years Purchasing Power Parity Read Chapter 4, pp. My presentations Profile Feedback Log out.
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