Question Details

San Gabriel- required return on that subsidiary 


1. Divestiture Decision. Colorado Springs Co. plans to divest either its Singapore or its Canadian
subsidiary. Assume that if exchange rates remain constant, the dollar cash flows each of these
subsidiaries would provide to the parent over time would be somewhat similar. However, the firm
expects the Singapore dollar to depreciate against the U.S. dollar, and the Canadian dollar to
appreciate against the U.S. dollar. The firm can sell either subsidiary for about the same price
today. Which one should it sell?

2. Divestiture Decision. San Gabriel Corp. recently considered divesting its Italian subsidiary and
determined that the divestiture was not feasible. The required rate of return on this subsidiary was
17 percent. In the last week, San Gabriel- required return on that subsidiary increased to 21
percent. If the sales price of the subsidiary has not changed, explain why the divestiture may now
be feasible.



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