Question Details

Fernand- owner is willing to sell the company 



One of the best methods of learning broad concepts in this text is to put yourself in the place of an
MNC manager or board member, and apply the concepts to make financial decisions. Board members
do not normally make the decisions that are discussed here, but must have the conceptual skills to
monitor the policies that are implemented by the MNC- managers. Thus, they must frequently ask
themselves what they would do if they were making the managerial decisions or setting corporate
polices.
Consider the following business that you could easily create: a business that teaches individuals in a
non-U.S. country to speak English. While this business is very basic, it still requires the same type of
decisions faced by large MNCs. Assume that you initially establish this business in Mexico.
Details of Your Business. You live in the U.S. You invested $60,000 to establish a business of a
language school called EE (Escuela de Engles) in Mexico City, Mexico. You hire local individuals in
Mexico who can speak English and train others how to speak English. You have a small subsidiary in
Mexico, which has an office and an attached classroom that you lease. Clients can come to your
subsidiary for a 1-month structured course in English, taught by your employees. You advertise in the
local newspapers to promote the teaching services offered by your business.
You also serve some individuals from Mexico who have taken English classes and want to come to the
U.S. for a one-week intense course in which they can improve and practice their English and practice
it. All revenue and expenses associated with your business are denominated in Mexican pesos. Most of
the profits from the business in Mexico are sent to you by your subsidiary at the end of each month.
While your expenses are somewhat stable, your revenue varies with the number of clients who sign up
for the English-speaking courses in Mexico.
You only need to know this background so that you can answer the related questions that are asked
about your business throughout the term. Answer each question as if you were serving on the board of
your business or as a manager of the business. The questions in the early chapters force you to assess
the firm- opportunities and exposure, while the later chapters force you to offer your input on
potential strategies that your business may pursue.
1.	
You have an opportunity to purchase a private competitor called Fernand in Mexico. You will use
only your funds if you decide to purchase the company.
a. When you attempt to determine the value of this company, how will you derive your required
rate of return? Specifically, should you use the U.S. or Mexico risk-free rate as a base when
deriving your required rate of return? Why?
b. Another Mexican firm called Vascon also considers the purchase of this firm. Explain why
Vascon- required rate of return may be higher than your required rate of return? Is there any
reason why Vascon- required rate of return may be lower than your required rate of return?
c. Assume that you and Vascon have the same expectations regarding the Mexican cash flows
that will be generated by Fernand. Fernand- owner is willing to sell the company for 2
million Mexican pesos. You and Vascon use a similar process to determine the feasibility of
acquiring a target. You both compare the present value of the target- cash flows to the
purchase price of the target. Based on your analysis, Fernand would generate a positive net
present value for your firm. Based on Vascon- analysis, Fernand would generate a negative
net present value for Vascon. How could you determine that the acquisition of Fernand is
feasible, while Vascon determines that the acquisition of Fernand is not feasible?
d. Repeat Question c, except reverse the assumptions. Based on your analysis, Fernand would
generate a negative net present value for your firm. Based on Vascon- analysis, Fernand
would generate a positive net present value for Vascon. How could you determine that the
acquisition of Fernand is not feasible, while Vascon determines that the acquisition of Fernand
is feasible?




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