. Blore expects to keep the target for three years, at which time it expects to sell the firm for 300 million Malaysian ringgit (MYR) after any taxes. . Blore expects a strong Malaysian economy. The estimates for revenue for the next year are MYR 200 million. Revenues are expected to increase by 8% in each of the following two years. * Cost of goods sold are 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 35 percent. Depreciation expenses are expected to be MYR 20 million per year for each of the next hree years. . The target will need MYR 7 million in cash each year to support existing operations. . The target's stock price is currently MYR 30 per share. The target has 9 million shares outstanding * Any remaining cash flows will be remitted by the target to Blore Inc. Blore uses the prevailing exchange rate of the MYR as the expected exchange rate for the next three years. This exchange rate is currently .25 USD/MYR Blore's 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. b. Will Blore Inc. be able to acquire the Malaysian target for a price lower than its valuation of the target? 3.6 (Ch. 16) How Country Risk Affects NPV. Hoosier, Inc., is planning a project in the United Kingdom. It would lease space for one year in a shopping mall to sell expensive clothes manufactured in the U.S. The project would end in one year, when all earnings would be remitted to Hoosier, Inc. Assume that no additional corporate taxes are incurred beyond those imposed by the British government. Since Hoosier, Inc., would rent space, it would not have any long-term assets in the United Kingdom, and expects the salvage (terminal) value of the project to be about zero. Assume that the project's required rate of return is 18 percent. Also assume that the initial outlay required by the parent to fill the store with clothes is USD 200,000. The pretax earnings are expected to the GBP 300,000 at the end of one year. The British GBP is expected to be worth USD 1.60 at the end of one year, when the after-tax earnings are converted to dollars and remitted to the United States. The following forms of country risk must be considered: . The British economy may weaken (probability = 30%%), which would cause the expected pretax earnings to be GBP 200,000. . The British corporate tax rate on income earned by U.S. firms may increase from 40 percent to 50 percent (probability = 20 percent)
