1. Valuation of a Private Target Rastell, Inc., a U.S.-based MNC, is considering the acquisition of a Russian target to produce personal computers (PCs) and market them throughout Russia, where demand for PCs has increased substantially in recent years. Assume that the stock prices of most Russian companies rose substantially just prior to Rastell's assessment of the target. If Rastell, Inc., acquires a private target in Russia, will it be able to avoid the impact of the high stock prices on business valuations in Russia?
2. 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.
3. Divestiture Decision Ethridge Co. of Atlanta, Georgia, has a subsidiary in India that produces products and sells them throughout Asia. In response to the September 11, 2001, terrorist attack on the United States, Ethridge Co. decided to conduct a capital budgeting analysis to determine whether it should divest the subsidiary. Why might this decision be different after the attack as opposed to before the attack? Describe the general method for determining whether the divestiture is financially feasible.
4. 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.
5. Monitoring Country Risk Once a project is accepted, country risk analysis for the foreign country involved is no longer necessary, assuming that no other proposed projects are being evaluated for that country. Do you agree with this statement? Why or why not?
6. 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?
7. 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?
8. How Country Risk Affects NPV Monk, Inc., is considering a capital budgeting project in Tunisia. The project requires an initial outlay of 1 million Tunisian dinars; the dinar is currently valued at $.70. In the first and second years of operation, the project will generate 700,000 dinars in each year. After 2 years, Monk will terminate the project, and the expected salvage value is 300,000 dinars. Monk has assigned a discount rate of 12 percent to this project. The following additional information is available:
There is currently no withholding tax on remittances to the United States, but there is a 20 percent chance that the Tunisian government will impose a withholding tax of 10 percent beginning next year.
There is a 50 percent chance that the Tunisian government will pay Monk 100,000 dinar after 2 years instead of the 300,000 dinars it expects.
The value of the dinar is expected to remain unchanged over the next 2 years.
a. Determine the net present value of the project in each of the four possible scenarios.
b. Determine the joint probability of each scenario.
c. Compute the expected NPV of the project and make a recommendation to Monk regarding its feasibility