Cross-Border Valuation Using the International CAPM and the Constant Perpetual Growth Model

Abstract

For cross-border valuation to be consistent with the International CAPM (ICAPM), translating projected cash flows across currencies should account for a currency risk premium and the economic interaction between uncertain cash flows and uncertain exchange rates. The conventional translation method ignores these items. This study proposes a translation method that is consistent with the ICAPM, given the constant perpetual growth model of valuation. Using empirical data, the study illustrates the conventional translation method’s potentially substantial valuation error if the ICAPM describes the risk-return trade-off in financial markets.

Keywords: cross-border valuation, exchange rates, currency risk premium, International CAPM

JEL Classification: G15