36. Impact of Uncertainty on an MNC's Valuation. Assume that Alpine Co. is a U.S.

firm that
has direct foreign investment in Brazil as a result establishing a subsidiary there. Political
conditions have changed in Brazil, but the best guess by investors regarding the future annual
cash flows for Alpine Co. has not changed despite the uncertainty surrounding those
estimates. In other words, the distribution of possible outcomes above and below the best
guess has widened. Would this change in uncertainty cause the prevailing value of Alpine Co.
to increase, decrease, or remain unchanged? Briefly explain.
ANSWER: The increase in uncertainty surrounding cash flows would cause the prevailing
value of Alpine Co. to decrease, because the required rate of return by investors would
increase. Thus, the numerator of the valuation of Alpine Co. has not changed, but the
denominator has increased, resulting in a lower valuation.