Question

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

• Izzy 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.
• Izzy expects a strong Malaysian economy. Consequently, the estimates for revenues for the next year are MYR300 million. Revenues are expected to increase by 11% over the following two years.
• Cost of goods sold are expected to be 50% 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 32%.
• 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.
• The target's current stock price is MYR32 per share. The target has 9,100,000 million shares outstanding.
• Any cash flows remaining after taxes are remitted by the target to Izzy, Inc. Izzy uses the prevailing exchange rate of the Malaysian ringgit as the expected exchange rate for the next three years. This exchange rate is currently $0.18.
• Izzy's required rate of return on similar projects is 13%.

The Malaysian target’s value based on its stock price is $___

Answer 1

The calculations of the valuations of Izzy are shown below in the table.The numbers are in Millions

	Details	Year 1	Year 2	Year 3
I	Revenue(@ 11% growth after yr 1)	300	333	369.63
II	Cost of goods sold (50% of revenues)	150	166.5	184.815
III	Gross profit ( I -II)	150	166.5	184.815
IV	Selling & administrative exp	40	40	40
V	Depreciation	15	15	15
VI	EBIT (III-IV-V)	95	111.5	129.815
VII	Tax expense (@32% of EBIT )	30.4	35.68	41.5408
VIII	Earnings after Tax (VI-VII)	64.6	75.82	88.2742
IX	Earnings after Tax + depreciation (VIII + V)	79.6	90.82	103.2742
X	Reinvested Funds to spport operations	9	9	9
XI	Total Sales at year 3			500
XII	Cash Flows(in MYR) ( IX-X+XI)	70.6	81.82	594.2742
XIII	Exchange rate	0.18	0.18	0.18
XIV	Cash Flows(in usd) (XII *XIII)	12.708	14.7276	106.9694
XV	PV factor(@13%)	0.884956	0.783147	0.69305
XVI	Cash flows * PV factor (xiv*xv)	11.24602	11.53387	74.13513	SUM=96.915

• Hence the value this target of Izzy firm is $96.915 million

The target's current stock price is MYR32 per share. The target has 9,100,000 million shares outstanding.

• Malaysian target’s value based on its stock price is = 9,100,000 * 32 * 0.18 = 52416000 $