Question 1 :

There are several reasons why the valuation of a privatized business may be more difficult than the valuation of a existing firm in a developed country.

First, Future cash flows associated with a privatized business are very uncertain because the businesses previously have been operating in environment of little or no competition.

Second, there are very limited data in some of these countries.

Third, economic conditions in these countries are very uncertain.

Fourth, exchange rate estimates are very uncertain.

Fifth, the cost of local financing for projects in developing countries is very uncertain . Sixth, the lack of established stock markets in developing countries prevents an MNC from deriving a value for a business based on comparable publicly held firms.

Seventh, the government may retain part of the firm , which could lead to control conflicts in the future.

Question 2:

When quantifying country risk:a.

weights should be equally allocated among factors.

b.

weights should be assigned to the political and financial factors according to their perceived importance.

c.

it is not generally necessary to construct separate ratings for political and financial risk since these will be equally weighed in the final analysis.

d.

the derived factors will be identical for all MNCs conducting business in that country.

Question 3 :

Years 0 1 2

Operating CF 525.00 551.25

Sale of estoya 1,200.00

Cash flows in new sol 525.00 1,751.25

Exchange rate $ 0.29 $ 0.27

Cash flows in $ $ 152.25 $ 472.84

Pv ( 18% discount rate ) $ 129.03 $ 339.59

Cumulative Pv $ 129.03 $ 468.62

Alaska, Inc. should not pay more than $ 468.2 million for Estoya Corp. Estoya is asking for 1.2 billion new sol, which translates to $ 348 million at the current exchange rate of $ 0.29. Therefore, Alaska , Inc. should purchase Estoya Corp

Question 4:

 Country risk analysis is important because it:a.

focuses on whether to hedge contractual transactions.

b.

focuses on the competitor firms in its industry.

c.

can be used to improve the analysis used to make long-term investing decisions.

d.

all of the above

Question 5 :

Years 0 1 2

Dinar remitted by subsidiary 700,000 700,000

Withholding tax 0 0

Dinar remitted after withholding tax 700,000 700,000

Salvage value 300,000

Exchange rate $ 0.70 $ 0.70

Cash flows to parent $ 490,000 $ 700,000

PV of parent cash flow $ 418,803 $ 511,359

Initial investment by parent $ 700,000

cumulative NPV -$ 281,197 $ 230,342

The project still have positive NPV of $ 230,342 and should be accepted. Notice that the NPV obtained using t adjusted discount rate is very close to expeceted NPv when the cash flows are adjusted