COMPUTATION Assume a potential target inF that the predicted exchange rate for t

Question

COMPUTATION Assume a potential target inF that the predicted exchange rate for the next two years is a constant USD 100 per EUR and an MNC requires 10% rate of return. Assume no taxes and no salvage value. Show your work for full credit. (4 points) a. What is the maximum the MNC would pay for the potential target? Note: 100/1.1-90.91 and 100/1.1 2-82.64 b. If the potential target is a public company with 1,000 shares outstanding, each trading for EUR 2, should the MNC purchase the target? Assume the current exchange rate is USD 1.20 per EUR and the shareholders req no premium.

Explanation / Answer

a) Maximum payment=2000/(1+10%)+1000/(1+10%)^2= EUR 2,645

b) Yes. It should purchase it as the investment of EUR 2000 (2*1000) will earn EUR 2,645.

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