Valuation of an MNC. Turnip plc (a UK fictitious company), based in Birmingham, considers several international opportunities
Question:
Valuation of an MNC. Turnip plc (a UK fictitious company), based in Birmingham, considers several international opportunities in Europe that could affect the value of its firm. The valuation is dependent on four factors:
(1) expected cash flows in pounds, (2) expected cash flows in euros that are ultimately converted into pounds,
(3) the rate at which it can convert euros to pounds, and (4) Turnip’s weighted average cost of capital. For each opportunity, identify the factors that would be affected.
a Turnip plans a licensing deal in which it will sell technology to a firm in Germany for £3,000,000; the payment is invoiced in pounds, and this project has the same risk level as its existing businesses.
b Turnip plans to acquire a large firm in Portugal that is riskier than its existing businesses.
c Turnip plans to discontinue its relationship with a US supplier so that it can import a small amount of supplies
(denominated in euros) at a lower cost from a Belgian supplier.
d Turnip plans to export a small amount of materials to Ireland that are denominated in euros.
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