Salmony, a U.S.-based firm, is considering a new project in China. Its exit policy depends on selling
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Question:
Salmony, a U.S.-based firm, is considering a new project in China. Its exit policy depends on selling its assets to a local firm for CNY20 million (Chinese Yuan Renminbi) in three years. The firm analyzes the political situation in China and assesses a 15% probability of not realizing this value because of the chance of expropriation or war.
The current spot exchange rate is CNY6.23/$, but the yuan is expected to appreciate by 2% per year over the next three years to CNY5.8707/$. If Salmony’s USD-based WACC is 10%, what is the most Salmony would pay now (in USD) for insurance coverage of this country risk?
Related Book For
Fundamentals of Corporate Finance
ISBN: 978-0077861629
8th Edition
Authors: Stephen A. Ross, Randolph W. Westerfield, Bradford D.Jordan
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