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Valuation of a Foreign Target. Gaston Co. (a U.S. firm) is considering the purchase of a target
company based in Mexico. The net cash flows to be generated by this target firm are expected to be 300 million pesos at the end of one year. The existing spot rate of the peso is $.14, while the expected spot rate in one year is $.12. All cash flows will be remitted to the parent at the end of one year. In addition, Gaston hopes to sell the company for 800 million pesos (after taxes) at the end of one year. The target has 10 million shares outstanding. If Gaston purchases this target, it would require a 25 percent return. The maximum value that Gaston should pay for this target company today is ____ pesos per share. Show your work.
Cash flows generated by target in one year = (Net cash flows + Selling price of theSolution : company)*Expected spot rate in 1 yearCash flows generated by target in one year = (300 + 800)*0.12…
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