Decision to Sell a Business Kentucky Co. has an existing business in Italy that it is trying to sell. It receives one offer today from Rome Co. for $20 million (after capital gains taxes are paid). Another Italian company, Venice Co., also wants to buy the business but will not have the funds to make the acquisition until two years from now. Venice Co. is meeting with Kentucky Co. today to negotiate the acquisition price that it will pay for Kentucky’s subsidiary in two years. If Kentucky Co. retains the business for the next two years, it expects that the business will generate 6 million euros per year in cash flows (after taxes are paid) at the end of each of the next two years, which would be remitted to the United States. The euro is presently valued at $1.20, and that rate can be used as a forecast of future spot rates. Kentucky would retain the business if it could earn a rate of return of at least 18 percent by keeping the firm for the next two years rather than selling it to Rome Co. now. Determine the minimum price in dollars for which Kentucky should be willing to sell its business (after accounting for capital gains taxes paid) to Venice Co. to satisfy its required rate of return.

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 15, Problem 20QA
Textbook Problem

Decision to Sell a Business Kentucky Co. has an existing business in Italy that it is trying to sell. It receives one offer today from Rome Co. for $20 million (after capital gains taxes are paid). Another Italian company, Venice Co., also wants to buy the business but will not have the funds to make the acquisition until two years from now. Venice Co. is meeting with Kentucky Co. today to negotiate the acquisition price that it will pay for Kentucky’s subsidiary in two years. If Kentucky Co. retains the business for the next two years, it expects that the business will generate 6 million euros per year in cash flows (after taxes are paid) at the end of each of the next two years, which would be remitted to the United States. The euro is presently valued at $1.20, and that rate can be used as a forecast of future spot rates. Kentucky would retain the business if it could earn a rate of return of at least 18 percent by keeping the firm for the next two years rather than selling it to Rome Co. now. Determine the minimum price in dollars for which Kentucky should be willing to sell its business (after accounting for capital gains taxes paid) to Venice Co. to satisfy its required rate of return.

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