Question Details

Merton Inc. has a subsidiary in Bulgaria 



1. 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 U.S., 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.

2. Feasibility of a Divestiture. Merton Inc. has a subsidiary in Bulgaria that it fully finances with
its own equity. Last week, a firm offered to buy the subsidiary from Merton Inc. for $60 million
in cash and the offer is still available this week as well. The annualized long-term risk-free rate in
the U.S. increased from 7% to 8% this week. The expected monthly cash flows to be generated by
the subsidiary have not changed since last week. The risk premium that Merton Inc. applies to its
projects in Bulgaria was reduced from 11.3% to 10.9% this week. The annualized long-term riskfree
rate in Bulgaria declined from 23% to 21% this week. Would the NPV to Merton Inc. from
divesting this unit be more or less than the NPV determined last week? Why? (No analysis is
necessary, but make sure that your explanation is very clear.)




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