Valuation of a Planned Divestiture
Response to the following problem:
Dallen Co. has a subsidiary in Mexico that does research and development and produces prescription pills that are transported to and sold in the United States. The parent used its own funds to build the subsidiary. Dallen Co. pays for the operations in Mexico in Mexican pesos, but all of its revenue from selling the pills in the United States is denominated in dollars. It has no other international business. Dallen's competitors are local firms in the United States that have no international operations. Two days ago, Dallen received an offer from a firm to buy Dallen's subsidiary, and the offer is in effect for a few days.
a. Yesterday, an event occurred that makes the parent of Dallen Co. believe that the Mexican peso will weaken substantially in the future. Do you think the event that occurred yesterday will increase, decrease, or have no impact on the likelihood that Dallen will accept the offer and sell its subsidiary at the existing offer price? Briefly explain.
b. Today, an event occurred that caused the risk-free interest rate in the United States to increase. Do you think the event that just occurred today will increase, decrease, or have no impact on the likelihood that Dallen will accept the offer and sell its subsidiary at the existing offer price? Briefly explain.