Question

Klimewsky, Inc., a U.S.-based MNC, has screened several targets. Based on economic and political considerations, only one eligible target remains in Malaysia. Klimewsky would like you to value this target and has provided you with the following information:

•             Klimewsky expects to keep the target for three years, at which time it expects to sell the firm for 500 million Malaysian ringgit (MYR) after deducting the amount for any taxes paid.

•             Klimewsky expects a strong Malaysian economy. Consequently, the estimates for revenues for the next year are MYR300 million. Revenues are expected to increase by 9% over the following two years.

•             Cost of goods sold are expected to be 60% of revenues.

•             Selling and administrative expenses are expected to be MYR40 million in each of the next three years.

•             The Malaysian tax rate on the target's earnings is expected to be 30%.

•             Depreciation expenses are expected to be MYR15 million per year for each of the next three years.

•             The target will need MYR9 million in cash each year to support existing operations. (This reduces cash remitted to Klimewsky)

•             No additional taxes are due in Malaysia.

•             Any cash flows remaining after taxes are remitted by the target to Klimewsky, Inc. Klimewsky uses the prevailing exchange rate of the Malaysian ringgit as the expected exchange rate for the next three years. This exchange rate is currently $.23. No US taxes are due.

•             Klimewsky's required rate of return on similar projects is 13%.

Question - List the risks you should consider while examining this proposal.

Answer 1

The risks are as follows

1.Downturn in Malaysian economy may reduce the demand.

2.Costs may increase over the estimated period resulting in loss of profits.

3. Tax rate in Malaysia may change especially if there is a political change in the country.

4. The exchange rate may fluctuate leading to a change in the value of remittance.

5. Presently there are no taxes in USA, however there may be a change in policy.

6. The required rate of return may change depending upon the debt equity structure of the business.