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Kentucky would only retain the business 


1. Foreign Acquisition Decision. Minnesota Company consists of two businesses. Its local business
is expected to generate cash flows of $1,000,000 at the end of each of the next 3 years. It also
owns a foreign subsidiary based in Mexico, whose business is selling technology in Mexico. This
business is expected to generate $2,000,000 in cash flows at the end of each of the next three
years. The main competitor of the Mexican subsidiary is Perez Co., a privately-held firm that is
based in Mexico. Minnesota Company just contacted Perez Co., and wants to acquire it. If it
acquires Perez, Minnesota would merge the operations of Perez Co. with its Mexican subsidiary-
business. It expects that these merged operations in Mexico would generate a total of $3,000,000
in cash flows at the end of each of the next 3 years. Perez Co. is willing to be acquired for a price
of 40 million pesos. The spot rate of the Mexican peso is $.10. The required rate of return on this
project is 24%. Determine the net present value of this acquisition by Minnesota Company.
Should Minnesota Company pursue this acquisition?

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 guarantee for Kentucky in two years (the price would be backed by a
reputable bank so there would be no concern about Venice Co. backing out of the agreement). If
Kentucky Co. retains the business for the next two years, it expects that the business would
generate 6 million euros per year in cash flows (after taxes are paid) at the end of each of the next
two years, which would be remitted to the U.S. 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% by keeping the firm for the next two 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.




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