Question

ASC decides to investigate a take-over of the local club Mexico Sports (MS), let a Dutch staff member join the board of MS, improve its performance, and sell the company after 3 years. The expected free cash flow for next year is 10.000.000 MPS (Mexican Pesos), 11.000.000 MPS in the second year and 12.000.000 in the third year. The expected value of MS at the end of the third year (on top of that year's free cash flow) at which MS is expected to be sold will be 6 times MS's free cash flow. All free cash flows are after tax (so disregard Mexican and Dutch taxes). The current exchange rate is MPS 10,00 per EUR. The rate is expected to change according to its PPP. The annual inflation rate for the coming three years in the Eurozone is expected to remain low. In South America however the inflation for the next years depends on the government's planned fiscal and monetary policy and that is not clear yet. Estimated is o 60% probability that inflation will be suppressed and the exchange rate will remain 10,00 MPS/EUR (scenario I) o 40% probability that the policy will fail, inflation will increase and the the euro will rise to MPS 12,00 next year, 14,00 the 2nd year and 16,00 the 3rd year (scenario II). At the end of the first investment year it will be clear what the policy and so the inflation rate will be for that year and the years to follow - and consequently the development of the MPS/EUR-rate. ASC's minimum required rate of return on investments is 20%, not a basispoint less. The current owners want not a peso less than MPS 60.000.000 for their company. As financial expert you start doing the necessary calculations for ASC:

b) Make an overview of the pros and cons of the take-over bid not only based on the provided data above but also take into account the issues with regard to an M&A transaction in class.

c) Mention the impact the two scenarios will have on the outcome of the take-over transaction. Explain the difference between a scenario analysis like this and a sensitivity analysis.

d) Show how the calculation of the expected value of MS for ASC from the expected cash flows and required rate of return on investment will look like based on NPV and payback method. So will ASC buy MS?

e) Describe the multiples method for valuating this acquisition.

f) In case the NPV is positive indicate what the IRR of this same project would be? Also explain why.

g) Describe the risks of the implementation of an acquisition like this. Include the risks of an investment decision in an international context.