Valuation of an MNC Birm Co., based in Alabama, is considering several international opportunities in Europe that could affect the firm’s value. Its valuation depends on four factors: (1) expected cash flows in dollars, (2) expected cash flows in euros that are ultimately converted into dollars, (3) the rate at which it can convert euros to dollars, and (4) Birm’s weighted average cost of capital. For each of the following opportunities, identify which factors will be affected. Birm plans a licensing deal in which it will sell technology to a firm in Germany for $\$ 3$ million; the payment is invoiced in dollars, and this project has the same risk level as its existing businesses. Birm plans to acquire a large firm in Portugal that is riskier than its existing businesses. Birm plans to discontinue its relationship with a U.S. supplier so that it can import a small amount of supplies (denominated in euros) at a lower cost from a Belgian supplier. Birm plans to export a small amount of materials to Ireland that are denominated in euros.

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 1, Problem 19QA
Textbook Problem

Valuation of an MNC Birm Co., based in Alabama, is considering several international opportunities in Europe that could affect the firm’s value. Its valuation depends on four factors: (1) expected cash flows in dollars, (2) expected cash flows in euros that are ultimately converted into dollars, (3) the rate at which it can convert euros to dollars, and (4) Birm’s weighted average cost of capital. For each of the following opportunities, identify which factors will be affected.

  1. Birm plans a licensing deal in which it will sell technology to a firm in Germany for $\$ 3$ million; the payment is invoiced in dollars, and this project has the same risk level as its existing businesses.
  2. Birm plans to acquire a large firm in Portugal that is riskier than its existing businesses.
  3. Birm plans to discontinue its relationship with a U.S. supplier so that it can import a small amount of supplies (denominated in euros) at a lower cost from a Belgian supplier.
  4. Birm plans to export a small amount of materials to Ireland that are denominated in euros.

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