Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Transcribed Image Text:PARK&SHOP and WELLCOME are operating supermarkets in Hong Kong. They are
competing with each other in terms of price and products.
PARK&SHOP is considering the possible acquisition of WELLCOME. Both companies have
no debt. PARK&SHOP estimates that the acquisition will create synergy by increasing its
total after-tax annual cash flows by $2.4 million forever.
The current market value of WELLCOME is $58 million, and that of PARK&SHOP is $107
million. The discount rate for the incremental cash flows is 10%. PARK&SHOP tries to
determine whether it should offer 40% of its stock or $73 million in cash to WELLCOME's
shareholders.
Required:
(a) What is the cost of each alternative?
(b) Calculate the net present value of each alternative. Suggest which
alternative PARK&SHOP should choose.
(c) Justify three rationales for a company to consider acquisition.
Transcribed Image Text:It is an ongoing issue in exchange rate manipulation. The United States has been protesting
for many years that renminbi or yuan (CNY), the currency in China, is being undervalued.
You would like to apply the concept of Purchasing Power Parity (PPP) to find out if such
accusation is correct. Following are data you have collected from July 2016 Big Mac Index.
Location
United States
China
Hong Kong
Big Mac prices in local currency July 2016 USD exchange rate
USD4.5567
CNY 16.00
HKD17.00
6.1341
7.7567
(a) Analyse whether the accusation by the United States regarding
undervaluation of the renminbi at that time was valid. Find out the
percentage of undervalue/overvalue of the renminbi against the US dollar
to support your view.
(b) Some countries encourage manipulation in their exchange rate relative to
those of some other countries as a means of relieving foreign trade
imbalances. Evaluate each of the following scenarios regarding its impact
that would have on the Hong Kong importers and Hong Kong exporters
doing business with the foreign country:
i The officials of Hong Kong Monetary Authority (HKMA) announce
that they are comfortable with the rising euro relative to the Hong
Kong dollar.
ii The Japanese government announces that it will print billions of new
yen and inject them into the economy in an effort to boost the local
economic activities.
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