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International Finance Discussion

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International Finance

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Recently, Marriott International opened the Al Jadaff hotel in Dubai. Discuss qualitatively (no need to use any numbers) how Marriott International should adjust the estimated cash flow for the project and the discount rate when evaluating this project. Which adjustment (cash flow or discount rate) do you believe would be most effective in reflecting the risk of this foreign project?

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International Finance

Qualitative discussion on the adjustment of cash flows for Marriott International

Through the investment in the Al Jadaff hotel in Dubai, Marriott International exposes themselves to country risk. The firm may choose to use cash flow adjustment methods to determine the present value of the project – which would drive further operational, investment and financing decisions. The use of cash flow adjustments would primarily involve identification of prominent risk factors in each year (Damodaran, 2008). Each risk factor is used to discount the estimated cash flow for each year. The result is a net present value of the hotel determined from adjusted cash flows to various risk factors.

Discount Rate Adjustment

Alternatively, Marriott International may choose to use the discount rate as an adjustment method. In this case, when evaluating the Al Jadaff hotel project, the firm should use the prevailing discount rate as a measure to estimate the country’s risk rating. This done owing to the correlation between the discount rate and the project’s rate of return. As such, the adjustment to the rate of return or the discount rate in the capital budgeting approach may be useful in the determination of country risk (Madura, 2008, pp. 459 – 460).

Most effective approach in reflecting risk of the foreign project

The better method that provides an effective approach is the use of estimated cash flows. The effectiveness of this approach stems from the use of each individual cash flow and the specific form of risk affecting that particular cash flow….

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Cash flow and working-capital management Case study

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Cash flow and working-capital management

1: Case reading: Read through the Horniman Horticulture case (Case 11) in the text and answer the following questions. (50 points)

Case description:

Horniman Horticulture case captures the problems concerning cash flow and working-capital management typical of small, growing businesses. At the end of 2005, Bob and Maggie Brown have completed their third year of operating Horniman Horticulture, a $1-million-revenue woody-shrub nursery in central Virginia. While experiencing booming demand and improving margins, the Browns are puzzled by their plummeting cash balance. The case highlights the difference between cash flow and accounting profits, as well as the common negative effects of growth on cash flow. The case also provides a forum for:

i. instilling appreciation for the relevance of free cash flow to business owners and managers,

ii. introducing financial-ratio analysis,

iii. working-capital management, and

iv. motivating the use of financial models.

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1): a. From an Income Statement perspective what is going right with this business?

i. list why you believe things are going right in terms of ratio analysis?

b. What concerns you with the balance sheet?

i. support your concerns with ratio analysis?

2. a. What are the 4-yr cumulative cash flows?

b. Where is the cash going?

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3. a. What is Maggie’s accounts payable policy?

b. Do you agree with Maggie Brown’s accounts-payable policy?

4. a. What are the alternatives for solving the business’s cash problem?

The free-cash-flow calculation provides a reasonable framework for establishing the alternatives facing the Browns.

b. Explain how realize the Browns can solve their problem?

2: Based on the 2016 financial report of Facebook, forecast the financial performance in 2017, using percent of sales forecasting method. (50 points)

Since there are only two balance sheets, you just use the data available to do forecasting. Let me know your method of finding your base year, average, last year’s value, etc.

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