John Deer, Inc., a U.S.-based MNC, has screened several targets. Based on economic and political considerations, only one eligible target remains in Singapore. John Deer would like you to value this target and has provided you with the following information: John Deer expects to keep the target for three years, at which time it expects to sell the firm for 200 million Singapore dollars (S$) after deducting the amount for any taxes paid. John Deer expects a strong Singapore. Consequently, the estimates for revenues for the next year are S$100 million. Revenues are expected to increase by 10% over the following two years. Cost of goods sold are expected to be 50% of revenues. Selling and administrative expenses are expected to be S$10 million in each of the next three years. The Singapore tax rate on the target's earnings is expected to be 20%. Depreciation expenses are expected to be S$5 million per year for each of the next three years. The target will need S$3 million in cash each year to support existing operations. The target's current stock price is S$25 per share. The target has 5 million shares outstanding. Any cash flows remaining after taxes are remitted by the target to John Deer, Inc. John Deer uses the prevailing exchange rate of the Singapore dollar as the expected exchange rate for the next three years. This exchange rate is currently $.70. John Deer's required rate of return on similar projects is 9%. Complete the worksheet below before you estimate the value of the target based on this information. Solution: Valuation of Singapore Target Based on the Assumptions Provided (numbers are in millions) Year 1 Year 2 Year 3 Revenue S$100 S$110 S$121 Cost of Goods Sold S$50 S$55 S$60.50 Gross Profit S$50 S$55 S$60.50 Selling & Admin. Exp. S$10 S$10 S$10 Depreciation S$5 S$5 S$5 Earnings Before Taxes S$35 S$40 S$45.50 Tax (20%) S$7 S$8 S$9.10 Earnings After Taxes S$28 S$32 S$36.40 +Depreciation S$5 S$5 S$5 -Funds to Reinvest S$3 S$3 S$3 Sale of Firm S$200 Cash Flows in S$ S$30 _____ _____ Exchange Rate of S$ $.70 _____ _____ Cash Flows in $ $21 _____ _____ PV (9% disc. rate) Cumulative PV 42. Based on the information above, what is the Singapore target's value based on its stock price? a. $5 million b. $25 million c. $125 million d. $87.5 million.