What is the maximum premium a U.S. acquirer would be expected to pay if the value of CPRI PLC (without epsilon) is $380 million?

Finance

Finance problem

Part A

Problem 1 (Answer all parts of this problem)
A U.S. based acquiring firm is considering making an offer for CPRI PLC, a Thailand-based company. Below you can find the up-to 5-years free cash flow (FCF) forecasts (which include epsilon) for CPRI PLC. Values are given in millions of Thai Bahts (THB). Some additional inputs/assumptions are provided below.

 

Five-Year Forecast:
FCFs (THB, in millions                Yr1   Yr2   Yr3   Yr4   Yr5

                                                          456   568   678   890   765

Additional Inputs/Assumptions:

Inflation rate,                                                                        2.40% 

US Exchange rate at time t = 0 (US$1:THB33.63)       33.63

Exchange rate depreciation                                                   -1.17%

Real discount rate                                                                 3.56%

  1. Compute the Present Value of CPRI PLC in TBH. [10% of total mark]
  2. Translate the cash flows into U.S. dollars. [10% of total mark]
  3. Estimate the discounted cash flow value of the investment under the two forecasts (THB and U.S. dollars). Did you come up with the same present value? What rate did you use to discount the U.S. dollar flows? What assumptions are necessary to obtain equivalency between approaches A (converting local flows into dollars and discounting at a dollar rate) and B (forecasting in local currency and discounting at a local rate)? [20% of total mark]
  4. What is the maximum premium a U.S. acquirer would be expected to pay if the value of CPRI PLC (without epsilon) is $380 million? [10% of total mark]