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.