A company in US is acquiring a company in UK and the US company is attempting to
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Question:
A company in US is acquiring a company in UK and the US company is attempting to value the UK company in USD. After repatriation, taxes and country related risks are taken into consideration, the free cash flow forecasts of the UK company for the next 3 years, states in GBP, are 20 million, 30 million and 40 million, respectively, and the company is expected to grow at a long term growth rate of 3% going forward. The appropriate risk adjusted discount rate for the comparable companies in US is 10% and remains constant for all years. Both companies are only financed with common equity.
Use the information as shown in the tables below to measure the value of the UK company in US$ under both the Decentralized and Centralized DCF approaches.
| Rf | Year 0 | |
| US | UK | |
| Yield on 5 year government bond | 2.04% | 0.77% |
| Yield on 30-year government bond | 2.82% | 1.89% |
| Spot Rate | Forward Mid Rate | ||||
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | |
| USD/GBP | 1.63 | 1.62 | 1.62 | 1.61 | 1.6 |
Expert Answer:
To value the UK company in USD using the Decentralized and Centralized DCF approaches we need to calculate the present value of the free cash flows FC... View the full answer
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