Divestiture of a Foreign Subsidiary
Response to the following problem:
Ved Co. (a U.S. firm) has a subsidiary in Germany that generates substantial earnings in euros each year. It will soon decide whether to divest the subsidiary. One week ago, a company offered to purchase the subsidiary from Ved Co., and Ved has not yet responded to this offer.
a. Since last week, the expected stream of euro cash flows has not changed, but the forecasts of the euro's value in future periods have been revised downward. When deciding whether a divestiture is feasible, Ved Co. estimates the NPV of the divestiture. Will Ved's estimated NPV of the divestiture be larger or smaller or the same as it was last week? Briefly explain
b. If the long-term interest rate in the United States suddenly declines and all other factors are unchanged, will the NPV of the divestiture be larger, smaller, or the same as it was last week? Briefly explain.