Uncertainty Surrounding an MNC’s Valuation Carlisle Co. is a U.S. firm that is about to purchase a large company in Switzerland at a purchase price of $20 million. This company, which produces furniture and sells it locally (in Switzerland), is expected to earn large profits every year. Following its acquisition, the company will become a subsidiary of Carlisle and will periodically remit its excess cash flows due to its profits to Carlisle Co. Assume that Carlisle Co. has no other international business. Carlisle has S10 million that it will use to pay for part of the Swiss company and will finance the rest of its purchase with borrowed dollars. Carlisle Co. can obtain supplies from either a U.S. supplier or a Swiss supplier (in which case the payment would be made in Swiss francs). Both suppliers are very reputable and there would be no exposure to country risk when using either supplier. Is the valuation of the total cash flows of Carlisle Co. more uncertain if it obtains its supplies from a U.S. firm or from a Swiss firm? Explain briefly.

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 24QA
Textbook Problem

Uncertainty Surrounding an MNC’s Valuation Carlisle Co. is a U.S. firm that is about to purchase a large company in Switzerland at a purchase price of $20 million. This company, which produces furniture and sells it locally (in Switzerland), is expected to earn large profits every year. Following its acquisition, the company will become a subsidiary of Carlisle and will periodically remit its excess cash flows due to its profits to Carlisle Co. Assume that Carlisle Co. has no other international business. Carlisle has S10 million that it will use to pay for part of the Swiss company and will finance the rest of its purchase with borrowed dollars. Carlisle Co. can obtain supplies from either a U.S. supplier or a Swiss supplier (in which case the payment would be made in Swiss francs). Both suppliers are very reputable and there would be no exposure to country risk when using either supplier. Is the valuation of the total cash flows of Carlisle Co. more uncertain if it obtains its supplies from a U.S. firm or from a Swiss firm? Explain briefly.

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