Valuation of a Foreign Target. Gaston Co.

(a U.S. firm) is considering the purchase of a target company based in Mexico. The net cash flows to be generated by this target firm are expected to be 300 million pesos at the end of 1 year. The existing spot rate of the peso is $.14, while the expected spot rate in 1 year is $.12. All cash flows will be remitted to the parent at the end of 1 year. In addition, Gaston hopes to sell the company for 800 million pesos (after taxes)

at the end of 1 year. The target has 10 million shares outstanding. If Gaston purchases this target, it would require a 25 percent return. The maximum value that Gaston should pay for this target company today is ____ pesos per share. Show your work.

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PROJECT Country A Country B Country C Country D Country E Country F COMPARISON OF 1-YEAR U.S. AND FOREIGN INTEREST RATES U.S. interest rate is higher than currency A's interest rate U.S interest rate is higher than currency B's interest rate U.S. interest rate is the same as currency C's interest rate U.S. interest rate is the same as currency D's interest rate U.S. interest rate is lower than currency E's interest rate U.S. interest rate is lower than currency F's interest rate FORECAST METHOD USED TO FORECAST THE SPOT RATE 1 YEAR FROM NOW Spot rate Forward rate Forward rate Spot rate Forward rate Spot rate