International Finance 535 Week 8 homework

Chapter 15(#8 and #20) Do not answer #7, it’s just information for #8

7. Valuing a Foreign Target Blore, Inc., a U.S.-based MNC, has screened several targets. Based on economic and political considerations, only one eligible target remains in Malaysia. Blore would like you to value this target and has provided you with the following information:

Blore expects to keep the target for 3 years, at which time it expects to sell the firm for 300 million Malaysian ringgit (MYR) after any taxes.

Blore expects a strong Malaysian economy. The estimates for revenue for the next year are MYR200 million. Revenues are expected to increase by 8 percent in each of the following 2 years.

Cost of goods sold is expected to be 50 percent of revenue.

Selling and administrative expenses are expected to be MYR30 million in each of the next 3 years.

The Malaysian tax rate on the target's earnings is expected to be 35 percent.

Depreciation expenses are expected to be MYR20 million per year for each of the next 3 years.

The target will need MYR7 million in cash each year to support existing operations.

The target's stock price is currently MYR30 per share. The target has 9 million shares outstanding.

Any remaining cash flows will be remitted by the target to Blore, Inc. Blore uses the prevailing exchange rate of the Malaysian ringgit as the expected exchange rate for the next 3 years. This exchange rate is currently $.25.

Blore's required rate of return on similar projects is 20 percent.

a. Prepare a worksheet to estimate the value of the Malaysian target based on the information provided.

b. Will Blore, Inc., be able to acquire the Malaysian target for a price lower than its valuation of the target?

8. Uncertainty Surrounding a Foreign Target Refer to question 7. What are some of the key sources of uncertainty in Blore's valuation of the target? Identify two reasons why the expected cash flows from an Asian subsidiary of a U.S.-based MNC would be lower if Asia experienced a new crisis.

20. Decision to Sell a Business Kentucky Co. has an existing business in Italy that it is trying to sell. It receives one offer today from Rome Co. for $20 million (after capital gains taxes are paid). Alternatively, Venice Co. wants to buy the business but will not have the funds to make the acquisition until 2 years from now. It is meeting with Kentucky Co. today to negotiate the acquisition price that it will pay for Kentucky in 2 years. If Kentucky Co. retains the business for the next 2 years, it expects that the business will generate 6 million euros per year in cash flows (after taxes are paid) at the end of each of the next 2 years, which would be remitted to the United States. The euro is presently $ 1.20, and that rate can be used as a forecast of future spot rates. Kentucky would only retain the business if it can earn a rate of return of at least 18 percent by keeping the firm for the next 2 years rather than selling it to Rome Co. now. Determine the minimum price in dollars at which Kentucky should be willing to sell its business (after accounting for capital gain taxes paid) to Venice Co. in order to satisfy its required rate of return.

 

Chapter 16 (#9 and #14)

9. Incorporating Country Risk in Capital Budgeting How could a country risk assessment be used to adjust a project's required rate of return? How could such an assessment be used instead to adjust a project's estimated cash flows?

14. Country Risk Ratings Assauer, Inc., would like to assess the country risk of Glovanskia. Assauer has identified various political and financial risk factors, as shown below. Assauer has assigned an overall rating of 80 percent to political risk factors and of 20 percent to financial risk factors. Assauer is not willing to consider Glovanskia for investment if the country risk rating is below 4.0. Should Assauer consider Glovanskia for investment?

POLITICAL RISK FACTOR

ASSIGNED RATING

ASSIGNED WEIGHT

Blockage of fund transfers

5

40%

Bureaucracy

3

60%

 

FINANCIAL RISK FACTOR

ASSIGNED RATING

ASSIGNED WEIGHT

Interest rate

1

10%

Inflation

4

20%

Exchange rate

5

30%

Competition

4

20%

Growth

5

20%

 

 

Chapter 15(#8 and #20) Do not answer #7, it’s just information for #8

7. Valuing a Foreign Target Blore, Inc., a U.S.-based MNC, has screened several targets. Based on economic and political considerations, only one eligible target remains in Malaysia. Blore would like you to value this target and has provided you with the following information:

Blore expects to keep the target for 3 years, at which time it expects to sell the firm for 300 million Malaysian ringgit (MYR) after any taxes.

Blore expects a strong Malaysian economy. The estimates for revenue for the next year are MYR200 million. Revenues are expected to increase by 8 percent in each of the following 2 years.

Cost of goods sold is expected to be 50 percent of revenue.

Selling and administrative expenses are expected to be MYR30 million in each of the next 3 years.

The Malaysian tax rate on the target's earnings is expected to be 35 percent.

Depreciation expenses are expected to be MYR20 million per year for each of the next 3 years.

The target will need MYR7 million in cash each year to support existing operations.

The target's stock price is currently MYR30 per share. The target has 9 million shares outstanding.

Any remaining cash flows will be remitted by the target to Blore, Inc. Blore uses the prevailing exchange rate of the Malaysian ringgit as the expected exchange rate for the next 3 years. This exchange rate is currently $.25.

Blore's required rate of return on similar projects is 20 percent.

a. Prepare a worksheet to estimate the value of the Malaysian target based on the information provided.

b. Will Blore, Inc., be able to acquire the Malaysian target for a price lower than its valuation of the target?

8. Uncertainty Surrounding a Foreign Target Refer to question 7. What are some of the key sources of uncertainty in Blore's valuation of the target? Identify two reasons why the expected cash flows from an Asian subsidiary of a U.S.-based MNC would be lower if Asia experienced a new crisis.

20. Decision to Sell a Business Kentucky Co. has an existing business in Italy that it is trying to sell. It receives one offer today from Rome Co. for $20 million (after capital gains taxes are paid). Alternatively, Venice Co. wants to buy the business but will not have the funds to make the acquisition until 2 years from now. It is meeting with Kentucky Co. today to negotiate the acquisition price that it will pay for Kentucky in 2 years. If Kentucky Co. retains the business for the next 2 years, it expects that the business will generate 6 million euros per year in cash flows (after taxes are paid) at the end of each of the next 2 years, which would be remitted to the United States. The euro is presently $ 1.20, and that rate can be used as a forecast of future spot rates. Kentucky would only retain the business if it can earn a rate of return of at least 18 percent by keeping the firm for the next 2 years rather than selling it to Rome Co. now. Determine the minimum price in dollars at which Kentucky should be willing to sell its business (after accounting for capital gain taxes paid) to Venice Co. in order to satisfy its required rate of return.

 

Chapter 16 (#9 and #14)

9. Incorporating Country Risk in Capital Budgeting How could a country risk assessment be used to adjust a project's required rate of return? How could such an assessment be used instead to adjust a project's estimated cash flows?

14. Country Risk Ratings Assauer, Inc., would like to assess the country risk of Glovanskia. Assauer has identified various political and financial risk factors, as shown below. Assauer has assigned an overall rating of 80 percent to political risk factors and of 20 percent to financial risk factors. Assauer is not willing to consider Glovanskia for investment if the country risk rating is below 4.0. Should Assauer consider Glovanskia for investment?

POLITICAL RISK FACTOR

ASSIGNED RATING

ASSIGNED WEIGHT

Blockage of fund transfers

5

40%

Bureaucracy

3

60%

 

FINANCIAL RISK FACTOR

ASSIGNED RATING

ASSIGNED WEIGHT

Interest rate

1

10%

Inflation

4

20%

Exchange rate

5

30%

Competition

4

20%

Growth

5

20%

 

 


Answer

Chapter 15 Multinational Restructuring

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