International firms will receive cash flows in a variety of currencies. Often you are called to value an overseas operation. In these circumstances, you have to decide on the currency you will use for estimating cash flows in your DCF model. On this page, we discuss if the choice of currency of cash flows matters when valuing an international firm? Accounting rules for currency translation can be very complex. We only discuss the basics from a valuation perspective and provide a simple Microsoft Excel illustration showing how the cash flow of a Brazilian firm is converted to USD given the current exchange rates and interest rates in Brazil and the USA.
Does the choice of currency of cash flows matter when valuing an international firm?
No, the currency of your model should not matter if you have used the appropriate currency conversion rates. The appropriate currency conversion rates are the rates consistent with the interest rates in both the currency. Read up on interest rate parity for more on this.
If the currency conversion is done right, you should theoretically arrive at the same valuation no matter what currency you chose. In valuation practice, you will not get the exact value but you should be pretty close.
Below is an illustration of the concept using simple numbers. We have valued a Brazilian firm assuming the home country is the US. The forward exchange rates used adheres to the interest rate parity concept. You can access the excel file here.
You will note that the valuation in USD and Brazilian Real is approximately the same (difference of only 0.66%).
