Question
You work for a U.S.-based firm that wants to acquire Q Corp, which is located in Malaysia. In initial negotiations, Q Corp has asked for
You work for a U.S.-based firm that wants to acquire Q Corp, which is located in Malaysia. In initial negotiations, Q Corp has asked for a purchase price of 10 million Malaysian ringgit (MYR). If your company completes the purchase, it will keep Q Corps operations for two years and then sell the company. You believe you can improve Q Corps current operations and generate operating cash flows of 3 million MYR in year one and 4 million MYR in year two. Given these improvements, you believe you will be able to resell Q Corp in two years for 12 million MYR. The current MYR exchange rate is $0.24, and exchange rate forecasts for the next two years indicate values of $0.24 and $0.25, respectively. Given these facts, should your firm pay MYR10 million for Q Corp if the required rate of return is 25%? What is the maximum price your firm should be willing to pay?
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