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FIN 535 Chapter 15 Question 11. Pricing a Foreign Target




FIN 535;Chapter 15;Question 11. Pricing a Foreign Target;Alaska, Inc. Would like to acquire Estoya Corp., which is located in Peru. In initial negotiations, Esotya has asked for a purchase, it would keep Esotoya?s operations for 2 years and then sell the company. In the recent past, Esotya has generated annual cash flows of 500 million new sol per year, but Alaska believes that it can increase these cash flows 5 percent each year by improving the operations of the plant. Given these improvements, Alaska believes it will be able to resell Estoya in 2 years for 1.2 billion new sol. The current exchange rate of the new sol is $.29, and exchange rate forecasts for the next 2 years indicate values of $.29 and $.27, respectively. Given these facts, should Alaska, Inc., pay 1 billion new sol for Estoya Corp. if the required rate of return is 18 percent? What is the maximum price Alaska should be willing to pay?;Question 19. Foreign Acquisition Decision;Idaho Co. consists of two businesses. Its local business is expected to generate cash flows of $1million at the end of each of the next 3 years. Its also owns a foreign subsidiary based in Mexico, whose business is selling technology in Mexico. This business is expected to generate $2 million in cash flows at the end of each of the next 3 years. The main competitor of the Mexican subsidiary in Perez Co., a privately held firm that is based in Mexico. Idaho Co. just contacted Perez Co. and wants to acquire it. If it acquires Perez, Idaho would merge the operations of Perez Co. with its Mexican subsidiary?s business. It expects that these merged operations in Mexico would generate a total of $3 million in cash flows at the end of each of the next 3 years Perez Co. is willing to be acquired for a price of 40 million pesos. The spot rate of the Mexican peso is $.10. The required rate of return on this project 24 percent. Determine the net present value of this acquisition by Idaho Co. Should Idaho Co. pursue this acquisition?;Chapter 16;Question 22. Integrating Country Risk and Capital Budgeting;Tovar Co. is a U.S. firm that has been asked to provide consulting services to help Grecia Co. (in Greece) improve its performance. Tovar would need to spend $300,000 today on expenses related to this project. In 1 year, Tovar will receive payment from Grecia, which will be tied to Grecia?s performance during the year. There is uncertainty about Grecia?s performance and about Grecia?s tendency for corruption.;Tovar expects that it will receive 400,000euros if Grecia achieves strong performance following the consulting job. However, there are two forms of country risk that are a concern to Tovar Co. There is an 80 percent chance that Grecia will achieve strong performance. There is a 20 percent chance that Grecia will perform poorly, and in this case, Tovar will receive a payment of only 200,000euros.;While there is a 90 percent chance that Grecia will make its payment to Tovar, there is a 10 percent chance that Grecia will become corrupt, and in this case, Grecia will not submit any payment to Tovar.;Assume that the outcome of Grecia?s performance is independent of whether Grecia becomes corrupt. The prevailing spot rate of the euro is $1.30, but Tovar expects that the euro will depreciate by 10 percent in 1 year, regardless of Grecia?s performance or whether it is corrupt.;Tovar?s cost of capital is 26 percent. Determine the expected value of the project?s net present value. Determine the probability that the project?s NPV will be negative.;Question 27. Political Risk and Project NPV;Drysdale Co. (a U.S. firm) is considering a new project that would result in cash flows of 5 million Argentine pesos in 1 year under the most likely economic and political conditions. The spot rate of the Argentine peso in 1 year is expected to be $.40 based on these conditions. However, it wants to also account for the 10 percent probability of a political crisis in Argentina, which would change the expected cash flows to 4 million Argentine pesos in 1 year. In addition, it wants to account for the 20 percent probability that the exchange rate may only be $.36 at the end of 1 year. These two forms of country risk are independent. Drysdale?s required rate of return is 25 percent and its initial outlay for this project is $1.4 million. Show the distribution of possible outcomes for the project?s net present value.


Paper#29248 | Written in 18-Jul-2015

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