11. Pricing a Foreign Target. Alaska Inc. would like to acquire Estoya Corp., which is...
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11. Pricing a Foreign Target. Alaska Inc. would like to acquire Estoya Corp., which is located in Peru. In initial negotiations, Estoya has asked for a purchase price of 1 billion Peruvian new sol. If Alaska completes the purchase, it would keep Estoya's operations for two years and then sell the company. In the recent past, Estoya has generated annual cash flows of 500 million new sol per year, but Alaska believes that it can increase these cash flows 5 percent each year by improving the operations of the plant. Given these improvements, Alaska believes it will be able to resell Estoya in two years for 1.2 billion new sol. The current exchange rate of the new sol is $.29, and exchange rate forecasts for the next two years indicate values of $.29 and $.27, respectively. Given these facts, should Alaska Inc. pay 1 billion new sol for Estoya Corp. if the required rate of return is 18 percent? What is the maximum price Alaska should be willing to pay? Should Alaska Purchase Estoya? Estoya- They are asking 1 Billion Peruvian New Sol (PNS) Current cash flow is 500.00 Million PNS Alaska Assumes- 5% yearly increase in cash flow Resell in two years for 1.2 Billion PNC Exchange Rates Current 1 PNS=$.29 Estimate by Alaska-$.29, then $.27
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