Question: 1. Uncertainty Surrounding a Foreign Target: 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.
2. 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.
3. 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?
4. 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?