Module II· DCF — Mechanics & FCFAdvanced

Question

How do you model a DCF for a multi-currency business (e.g. a European company with 40% US revenue)?

Answer

Three approaches:

Single-currency: convert all cash flows into EUR at forward rates or spot, and use a EUR WACC. Simple, but forward rates are imprecise.
Multi-currency: discount USD cash flows at a USD WACC, then convert into EUR at spot FX. Theoretically cleaner.
PPP-adjusted: real FCFs with a real discount rate. In practice: method (1) is the IB standard.

Important

The WACC should carry a weighted mix of EUR and USD risks (a USD ERP instead of a EUR ERP for the USD share), not blindly the home-market WACC. Genuinely relevant for targets with a large US share (software, pharma).

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