Financial Decisions in Emerging Markets

Paperback | February 15, 2002

byJaime Sabal

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Due to the accelerated global integration that the world has witnessed in recent years, international trade has grown exponentially. As recipients of direct investments from developed nations, emerging countries have benefited enormously from this process. Every sound investment decisiondemands the application of modern financial theory. However, the theories that are advanced are most often set in the context of developed countries, and do not capture the intricacies of operating in the developing world. Despite the importance of investment flows to developing countries today, itis surprising that so little has been done to adapt financial principles to the special realities of these countries. This book has been written with the objective of filling this void. Financial Decisions in Emerging Markets is the first corporate finance book to take into account the context of emerging markets and the problems they present, including the relative lack of market efficiency. Reviewing financial theory, it focuses on investment and financing decisions as theyrelate to investors in emerging markets. The objective is to juxtapose the assumptions of financial theory against the realities prevailing in emerging countries and to propose more relevant approaches for investment analysis in these nations. Providing readers with a solid background to evaluateinvestments in emerging countries, this book is ideal for graduate students taking courses in financial decisions in emerging markets, corporate finance in developing countries, and international corporate finance.

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From the Publisher

Due to the accelerated global integration that the world has witnessed in recent years, international trade has grown exponentially. As recipients of direct investments from developed nations, emerging countries have benefited enormously from this process. Every sound investment decisiondemands the application of modern financial theor...

Jaime Sabal is at Instituto de Estudios Superiores de Administracion.
Format:PaperbackDimensions:304 pages, 9.09 × 6.1 × 0.79 inPublished:February 15, 2002Publisher:Oxford University PressLanguage:English

The following ISBNs are associated with this title:

ISBN - 10:0195144597

ISBN - 13:9780195144598

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Table of Contents

IntroductionChapter 1: Financial Theory in Emerging Markets1.1. Financial Theory - What Does it Offer?1.2. The Limitations of Financial Theory1.3. Emerging Countries1.4. Conclusions1.5. Questions and ProblemsPart I: The Investor and the FirmChapter 2: Consumption, Investment, and Value2.1. Consumption and Investment: A Complex Relationship2.2. The Fisher Separation Principle2.3. Consumption and Investment in Practice2.4. Real and Financial Investments2.5. Investments in Emerging Markets: Concluding Remarks2.6. Conclusions2.7. Questions and ProblemsAppendix 2A: Net Present ValueChapter 3: The Impact of Risk3.1. Risk and Investment Decisions3.2. The Utility Function3.3. Net Present Value and Returns3.4. Choosing the Best Investment3.5. Limitations of the Normal Distribution3.6. Conclusions3.7. Questions and ProblemsAppendix 3A: Probability, Expected Value, and Standard DeviationAppendix 3B: The Normal DistributionChapter 4: The Benefits of Diversification4.1. Building Investment Portfolios4.2. Portfolio Risk and Return4.3. Finding the Optimum Portfolio4.4. Conclusions4.5. Questions and ProblemsAppendix 4A: Covariance and CorrelationAppendix 4B: The Minimum Variance Frontier with N AssetsChapter 5: Personal Investments5.1. The Relationship Between Probability and Return5.2. Probabilities, Returns, and Portfolio Selection5.3. Benefits and Costs of a Controlling Stake5.4. The Evaluation of Real Investments5.5. Conclusions5.6. Questions and ProblemsAppendix 5A: Probabilities on the Normal DistributionPart I: The Investor and the Firm: SummaryPart II: Firm and InvestmentChapter 6: The Classical Model6.1. Real Investments and the Firm6.2. Separation Between Consumption and Investment Under Uncertainty6.3. A New Efficient Frontier: The Capital Market Line6.4. The CAPM6.5. Conclusions6.6. Questions and ProblemsAppendix 6A: Proof of the CAPMChapter 7: A Modified CAPM for Emerging Countries7.1. Applicability of the CAPM7.2. What Country Risk Means7.3. A Modified CAPM7.4. Conclusions7.5. Questions and ProblemsChapter 8: Valuation in Emerging Markets8.1. Inflation and Exchange Rates8.2. Subsidies8.3. Capital Rationing8.4. Horizon and Terminal Value8.5. References and Adjustments to Expected Net Present Value8.6. Conclusions8.7. Questions and ProblemsAppendix 8A: Selection of Alternatives Under Capital RationingAppendix 8B: PerpetuitiesChapter 9: The Value of Flexibility9.1. An Introductory Example9.2. What Is an Option?9.3. The Binomial Model9.4. The Black-Scholes Model9.5. What Determines the Value of an Option Before Expiration?9.6. Types of Options9.7. Flexibility in Emerging Markets9.8. An Investment in a Mining Development9.9. Real Options and Strategy9.10. Some Comments on Valuing with Real Options9.11. Conclusions9.12. Questions and ProblemsAppendix 9A: Derivation of the Black-Scholes EquationPart II: Firm and Investment: SummaryPart III: Financing and InvestmentChapter 10: Financing in Theory10.1. Firm Financing10.2. A Simple Model10.3. What Happens When There Are Taxes?10.4. The Costs of Financial Distress10.5. Conclusions10.6. Questions and ProblemsChapter 11: Financing in Practice11.1. The Determinants of Leverage11.2. Leverage in Emerging Markets11.3. A Practical Determination of Leverage in Emerging Markets11.4. Cost of Capital and Discount Rate in Emerging Countries11.5. Conclusions11.6. Questions and ProblemsChapter 12: Financing and Value12.1. The Value of Financial Flexibility12.2. Financing Strategy12.3. Conclusions12.4. Questions and ProblemsAppendix 12A: The Conditions for Cash Dividend IrrelevancePart III: Financing and Investment SummaryChapter 13: Final Remarks13.1. The Value of Investment Opportunities13.1. Country Risk and Cash Flow Estimation13.1. Valuation Methods13.1. Financing DecisionsAnswers to the End-of-Chapter Questions and Problems

Editorial Reviews

From the Foreword: "This book will appeal to practitioners, development experts as well as students of finance interested in emerging markets-in the latter case perhaps using a standard textbook complemented by the present volume's perspective on 'what's different?' In this context, the bookshould be welcomed by scholars and practitioners alike."--Ingo Walter, New York University