Austin Corp. is a US$-$based MNC that sells video games to US consumers; it also has

European subsidiaries that produce and sell the games in Europe. The firm$$s European

earnings are denominated in euros and these earnings are typically remitted to the US

parent.

In year $0($Y$0),$ Austin received $$40$ million in cash flows from its US operations and $20$

million euros from its European operations. The euro was valued at $$1\mathrm{.}30$ when remitted

to the US parent.

Assume that Austin Co$.$ plans to continue its business in the US and Europe for the next

three years $($Y$1,$ Y$2,$ and Y$3).$ Its expected cash flows would be $$66$ million for each of the

next three years, $2/3$ from US operations and $1/3$ from its European operations.

Assume a cost of capital of $10\%$ for the entire period. Changes in the Euro value are not

expected.

a$.$ Obtain the expected cash flow for Austin in dollars for year $0.$

b$.$ Valuate Austin for Y$1,$ Y$2,$ and Y$3.$

Now assume that Austin expects to receive $$40$ million in cash flows from its US

operations for years Y$1,$ Y$2,$ and Y$3.$ Austin also expects a recession in Europe, which may

lead to reduced European demand for many US products. The company adjusts its

expected euro cash flows from European operations to $16$ million per year in Y$1,$ Y$2,$ and

Y$3.$ The firm expects that a European recession will weaken the euro. The projected euro

value is expected to be $1\mathrm{.}30$ for Y$1,1\mathrm{.}25$ for Y$2$ and $1\mathrm{.}15$ for Y$3.$

Assume a cost of capital of $10\%$ for the entire period.

c$.$ Valuate Austin for Y$1,$ Y$2$ and Y$3.$