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Senser intended to operate the subsidiary 



1. Pricing a Foreign Target. Alaska Inc. would like to acquire Estoya Corp., which is located in
Peru. In initial negotiations, Estoya has asked for a purchase price of 1 billion Peruvian new sol.
If Alaska completes the purchase, it would keep Estoya- operations for two years and then sell
the company. In the recent past, Estoya has generated annual cash flows of 500 million new sol
per year, but Alaska believes that it can increase these cash flows by 5 percent each year by
improving the operations of the plant. Given these improvements, Alaska believes it will be able
to resell Estoya in two years for 1.2 billion new sol. The current exchange rate of the new sol is
$.29, and exchange rate forecasts for the next two years indicate values of $.29 and $.27,
respectively. Given these facts, should Alaska Inc. pay 1 billion new sol for Estoya Corp. if the
required rate of return is 18 percent? What is the maximum price Alaska should be willing to
pay?

2. Global Strategy. Senser Co. established a subsidiary in Russia two years ago. Under its original
plans, Senser intended to operate the subsidiary for a total of four years. However, it would like
to reassess the situation, since exchange rate forecasts for the Russian ruble indicate that it may
depreciate from its current level of $.033 to $.028 next year and to $.025 in the following year.
Senser could sell the subsidiary today for 5 million rubles to a potential acquirer. If Senser
continues to operate the subsidiary, it will generate cash flows of 3 million rubles next year and 4
million rubles in the following year. These cash flows would be remitted back to the parent in the
U.S. The required rate of return of the project is 16 percent. Should Senser continue operating the
Russian subsidiary?



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