Assume a potential target in Japan generates cash flows of EUR 1,000 in year 1 and EUR 2,000 in year 2. Also assume that the predicted exchange rate for the next two years is a constant USD 1.00 per EUR and an MNC requires 10% rate of return. Assume no taxes. Show your work for full credit.
a) What is the maximum the MNC would pay for the potential target? Note: 100/1.1 = 90.91 and 100/1.1^2 = 82.64
b) If the potential target is a public company with 1,000 shares outstanding, each trading for EUR 2, should the MNC purchase the target? Assume the current exchange rate is USD 1.20 per EUR and the shareholders require no premium.
Please show your work not using Excel.