Question 5. Cross-border Valuation A company in US is acquiring a company in UK, and the US company is attempting to value the UK company in USD. After repatriation, taxes and country-related risks are taken into consideration, the free cash flow forecasts of the UK company for the next four years, states in GBP, are 10 million, 20 million, 30 million and 40 million, respectively, and the company is expected to grow at a long term growth rate of 2% going forward. The appropriate risk-adjusted discount rate for the comparable companies in US is 8% and remains constant for all years. Both companies are only financed with common equity. (1) Based on the exchange rate as shown in Panel B, which currency is expected to appreciate? Depreciate? (2) Use the information as shown in the tables below to measure the value of the UK company in US$ under both the Decentralized and Centralized DCF Approaches. Panel A. Government Bond Yield Rf Year 0 UK US 1.68% Yield on 5-year government bond 0.35% Yield on 30-year government bond 2.44% 1.16% Panel B. Exchange Rate Spot Rate Forward Mid-Rate Year 0 Year 1 Year 2 Year 3 Year 4 GBP/USD 0.82 0.81 0.79 0.74 0.74 Question 5. Cross-border Valuation A company in US is acquiring a company in UK, and the US company is attempting to value the UK company in USD. After repatriation, taxes and country-related risks are taken into consideration, the free cash flow forecasts of the UK company for the next four years, states in GBP, are 10 million, 20 million, 30 million and 40 million, respectively, and the company is expected to grow at a long term growth rate of 2% going forward. The appropriate risk-adjusted discount rate for the comparable companies in US is 8% and remains constant for all years. Both companies are only financed with common equity. (1) Based on the exchange rate as shown in Panel B, which currency is expected to appreciate? Depreciate? (2) Use the information as shown in the tables below to measure the value of the UK company in US$ under both the Decentralized and Centralized DCF Approaches. Panel A. Government Bond Yield Rf Year 0 UK US 1.68% Yield on 5-year government bond 0.35% Yield on 30-year government bond 2.44% 1.16% Panel B. Exchange Rate Spot Rate Forward Mid-Rate Year 0 Year 1 Year 2 Year 3 Year 4 GBP/USD 0.82 0.81 0.79 0.74 0.74