Valuing a Foreign Target
Response to the following problem:
Blore, Inc., a U.S.-based MNC, has screened several targets. Based on economic and political considerations, only one eligible target remains in Malaysia. Blore would like you to value this target and has provided you with the following information
¦ Blore expects to keep the target for 3 years, at which time it expects to sell the firm for 300 million Malaysian ringgit (MYR) after any taxes.
¦ Blore expects a strong Malaysian economy. The estimates for revenue for the next year are MYR200 million. Revenues are expected to increase by 8 percent in each of the following 2 years.
¦ Cost of goods sold is expected to be 50 percent of revenue.
¦ Selling and administrative expenses are expected to be MYR30 million in each of the next 3 years.
¦ The Malaysian tax rate on the target's earnings is expected to be 35 percent.
¦ Depreciation expenses are expected to be MYR20 million per year for each of the next 3 years.
¦ The target will need MYR7 million in cash each year to support existing operations
¦ The target's stock price is currently MYR30 per share. The target has 9 million shares outstanding.
¦ Any remaining cash flows will be remitted by the target to Blore, Inc. Blore uses the prevailing exchange rate of the Malaysian ringgit as the expected exchange rate for the next 3 years. This exchange rate is currently $.25
¦ Blore's required rate of return on similar projects is 20 percent.
a. Prepare a worksheet to estimate the value of the Malaysian target based on the information provided.
b. Will Blore, Inc., be able to acquire the Malaysian target for a price lower than its valuation of the target?