YummyYummies (Bangladesh). ArtemisPrivEqui, a Greek-based private equity firm, is trying to determine what it should pay for YummyYummies, a food processing firm in Bangladesh. ArtemisPrivEqui estimates that YummyYummies will generate a free cash flow of 80 million Bangladeshi taka (BDT) next year (2016), and that this free cash flow will continue to grow at a constant rate of 10.0% per annum indefinitely.

A private equity firm like ArtemisPrivEqui, however, is not interested in owning a company for long, and plans to sell the Bangladeshi firm at the end of three years for approximately 10 times YummyYummies’s free cash flow in that year. The current spot exchange rate is BDT78/€, but the Bangladeshi inflation rate is expected to remain at a relatively high rate of 12% per annum compared to the Greek euro inflation rate of only 2.0% per annum. ArtemisPrivEqui expects to earn at least a 15% annual rate of return on international investments like YummyYummies.

a. What is YummyYummies’s worth if the Bangladeshi taka were to remain fixed over the three-year investment period?

b. What is YummyYummies’s worth if the Bangladeshi taka were to change in value over time according to purchasing power parity?