Delta Equity , a U.S. - based private equity firm , is trying to determine what it should pay

for a tool manufacturing firm in Honduras named Kellogg's . Delta Equity estimates that Kellogg's

will generate a free cash flow of 130,000 Honduran lempiras ( Lp ) next year ( 2017 ) , and that this free

cash flow will continue to grow at a constant rate of 8.0 % per annum indefinitely .

A private equity firm like Delta Equity , however , is not interested in owning a company for long , and

plans to sell Kellogg's at the end of three years for approximately 10 times Kellogg's's free cash

flow in that year . The current spot exchange rate is Lp14.50 / $ , but the Honduran inflation rate is

expected to remain at a relatively high rate of 16.0 % per annum compared to the U.S. dollar inflation

rate of only 2.0 % per annum . Delta Equity expects to earn at least a 20 % annual rate of return on

international investments like Kellogg's .

a . What is Kellogg's worth if the Honduran lempira were to remain fixed over the three year

investment period ?

b . What is Kellogg's worth if the Honduran lempira were to change in value over time according to

purchasing power parity ?