Pricing a Foreign Target Alaska, Inc., would like to acquire Estoya Corp., which is located in Peru.

Pricing a Foreign Target Alaska, Inc., would like to acquire
Estoya Corp., which is located in Peru. In initial negotiations, Estoya has
asked for a purchase price of 1 billion Peruvian new sol. If Alaska completes
the purchase, it would keep Estoya’s operations for 2 years and then sell the
company. In the recent past, Estoya has generated annual cash flows of 500
million new sol per year, but Alaska believes that it can in crease these cash
flows by 5 percent each year by improving the operations of the plant. Given
these improvements, Alaska believes it will be able to resell Estoya in 2

Pricing a Foreign Target Alaska, Inc., would like to acquire
Estoya Corp., which is located in Peru. In initial negotiations, Estoya has
asked for a purchase price of 1 billion Peruvian new sol. If Alaska completes
the purchase, it would keep Estoya’s operations for 2 years and then sell the
company. In the recent past, Estoya has generated annual cash flows of 500
million new sol per year, but Alaska believes that it can in crease these cash
flows by 5 percent each year by improving the operations of the plant. Given
these improvements, Alaska believes it will be able to resell Estoya in 2 years
for 1.2 billion new sol. The current exchange rate of the new sol is $.29, and exchange
rate forecasts for the next 2 years indicate values of $.29 and $.27,
respectively. Given these facts, should Alaska, Inc., pay 1 billion new sol for
Estoya Corp. if the required rate of return is 18 percent? What is the maximum
price Alaska should be willing to pay?

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