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5. You have an opportunity to buyout an overseas Mexican competitor essentially out of your own funds. Answer for the following situations: a. When you
5. You have an opportunity to buyout an overseas Mexican competitor essentially out of your own funds. Answer for the following situations: 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 Mexico risk-free rate as a base when deriving your required rate of return? Why? [2] b. Another Mexican firm also enters the race for purchasing this firm. Explain why the new player's required rate of return may be higher or lower than yours? [2] c. Assume that you and the New Player have the same expectations regarding the Mexican cash flows that will be generated post the buyout. The target firm's owner is willing to sell the company for 2 million Mexican pesos. Both the acquiring firms use a similar process to determine the feasibility of acquiring a target. You both compare the present value of the target's cash flows to the purchase price of the target. Based on your analysis, the target would generate a positive net present value for your firm. The analysis by the New Player is exactly reverse. How could you determine that the acquisition is feasible, while the New Player decides otherwise? [2] d. Review the political risk factors and identify those that could possibly affect your business. Explain how your cash flows could be affected? [2] 6. Assume there is an upcoming election in Mexico that may result in a complete change in government. Explain why such an election can have significant effects on your cash flows. 121 5. You have an opportunity to buyout an overseas Mexican competitor essentially out of your own funds. Answer for the following situations: 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 Mexico risk-free rate as a base when deriving your required rate of return? Why? [2] b. Another Mexican firm also enters the race for purchasing this firm. Explain why the new player's required rate of return may be higher or lower than yours? [2] c. Assume that you and the New Player have the same expectations regarding the Mexican cash flows that will be generated post the buyout. The target firm's owner is willing to sell the company for 2 million Mexican pesos. Both the acquiring firms use a similar process to determine the feasibility of acquiring a target. You both compare the present value of the target's cash flows to the purchase price of the target. Based on your analysis, the target would generate a positive net present value for your firm. The analysis by the New Player is exactly reverse. How could you determine that the acquisition is feasible, while the New Player decides otherwise? [2] d. Review the political risk factors and identify those that could possibly affect your business. Explain how your cash flows could be affected? [2] 6. Assume there is an upcoming election in Mexico that may result in a complete change in government. Explain why such an election can have significant effects on your cash flows. 121
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