You have an opportunity to purchase a private competitor called Fernand in Mexico. If you decide to purchase the company, you will use only your own funds.

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 the Mexican risk-free rate as a base when deriving your required rate of return? Why?

b. Another Mexican firm called Vascon is also considering acquiring this firm. Explain why Vascon’s required rate of return may be higher than your required rate of return. Is there any reason why Vascon’s 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’s 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 the target. You both compare the present value of the target’s cash flows to the purchase price. Based on your analysis, Fernand would generate a positive net present value (NPV) for your firm. Based on Vascon’s analysis, Fernand would generate a negative NPV for Vascon. How could you determine that the acquisition of Fernand is feasible, while Vascon determines that the acquisition is not feasible?

d. Repeat part

(c) but reverse the assumptions. That is, you determine that Fernand would generate a negative NPV for your firm, whereas Vascon determines that Fernand would generate a positive NPV. How could you determine that the acquisition of Fernand is not feasible, while Vascon determines that the acquisition of Fernand is feasible?