Question

Explain briefly how capital market segmentation can be accommodated in foreign project valuation (aka multinational capital budgeting) and importance of such accommodation in capital budgeting for multinational financial-managers

Answer 1

Capital market segmentation can be accommodated in foreign project valuation by benchmarking the return expectation of a project based on the average equity returns exhibited by the capital market in that region. For example, if there are two projects A and B under consideration in the countries India and China. Then equity return expectations of project A have to be benchmarked to India's equity market returns and project B's return has to be benchmarked to China's market.

Such a segmentation and return evaluation helps in the objective assessment of each project keeping in mind the unique country-specific situations facing each project. It helps in arriving at a better estimate of the risk-adjusted return that can be obtained from the project and also taking the final decision of whether to pursue the porject or not.