1 Murphy Toys Inc., a U.S.-based MNC, has screened several targets. Based on economic and political considerations, only one eligible target remains in Malaysia. Murphy would like you to value this target and has provided you with the following information:

Murphy expects to keep the target for three years, at which time it expects to sell the firm for 280 million Malaysian ringgit (MYR) after any taxes.

Murphy expects a strong Malaysian economy. The estimates for revenue for the next year are MYR200 million. Revenues are expected to increase by 8% in each of the following two years.

Cost of goods sold is expected to be 50% of revenue.

Selling and administrative expenses are expected to be MYR30 million in each of the next three years.

The Malaysian tax rate on the target's earnings is expected to be 25 percent.

Depreciation expenses are expected to be MYR22 million per year for each of the next three years.

The target will need to reinvest MYR6 million in cash each year to support existing operations.

The target's stock price is currently MYR32 per share. The target has 8.5 million shares outstanding.

Any remaining cash flows will be remitted by the target to Murphy Inc. Murphy uses the prevailing exchange rate of the Malaysian ringgit as the expected exchange rate for the next three years. This exchange rate is currently $.25.

Murphys required rate of return on similar projects is 20 percent.

a) Prepare a worksheet to estimate the value of the Malaysian target based on the information provided. Please use the table provided below.

Valuation of Malaysian Target Based on the Assumptions Provided

(numbers are in millions)

Year 1 Year 2 Year 3

Revenue

Cost of Goods Sold

Gross Profit

Selling & Admin. Exp.

Depreciation

Earnings Before Taxes

Tax (25%)

Earnings After Taxes

+Depreciation

Funds to Reinvest

Sale of Firm

Cash Flows in MYR

Exchange Rate of MYR $.25 $.25 $.25

Cash Flows in $

PV (20% disc. rate)

Cumulative PV

Value of Malaysian target to Murphy = _______________

b) Will Murphy Toys Inc. be able to acquire the Malaysian target for a price lower than its valuation of the target? Explain.