Divestiture of a Foreign Subsidiary Rudecki Co. (a U.S. firm) has a Polish subsidiary that it is considering divesting. The subsidiary is completely focused on research and development for Rudecki’s other business. Rudecki has cash outflows (paid in zloty, the Polish currency) for the laboratories and scientists in Poland. Although the subsidiary does not generate any sales, its research and development lead to new products and higher sales of products that are sold solely in the United States and denominated in dollars. There is no foreign competition. Last week, a firm offered to purchase the subsidiary for $10 million, and the offer is still available. Today Rudecki has revised its forecasts of the zloty upward for all future periods. Will today’s adjustment of the exchange rate forecasts increase, decrease, or have no effect on the net present value of a divestiture of this subsidiary from Rudecki’s perspective? Briefly explain. (Keep in mind that the NPV of the divestiture is not the same as the NPV that results from acquiring a project.)

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 25QA
Textbook Problem

Divestiture of a Foreign Subsidiary Rudecki Co. (a U.S. firm) has a Polish subsidiary that it is considering divesting. The subsidiary is completely focused on research and development for Rudecki’s other business. Rudecki has cash outflows (paid in zloty, the Polish currency) for the laboratories and scientists in Poland. Although the subsidiary does not generate any sales, its research and development lead to new products and higher sales of products that are sold solely in the United States and denominated in dollars. There is no foreign competition. Last week, a firm offered to purchase the subsidiary for $10 million, and the offer is still available. Today Rudecki has revised its forecasts of the zloty upward for all future periods. Will today’s adjustment of the exchange rate forecasts increase, decrease, or have no effect on the net present value of a divestiture of this subsidiary from Rudecki’s perspective? Briefly explain. (Keep in mind that the NPV of the divestiture is not the same as the NPV that results from acquiring a project.)

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