A Canadian firm acquires a British firm that will generate cash flows of 10,000 pounds next year and these cash flows will grow at 6% a year.If the British WACC is 9% and the spot exchange rate is 1.9 CAD/GBP,what is the present value (PV)of the cash flows from this acquisition to domestic shareholders?

Question

Quizplus · Accepted Answer

The correct answer is A because the present value of the cash flows from this acquisition to domestic shareholders is $633,333. This is calculated by taking the present value of the cash flows in British pounds and then converting them to Canadian dollars using the spot exchange rate. The present value of the cash flows in British pounds is £10,000 / (0.09 - 0.06) = £166,666.67. Converting this to Canadian dollars using the spot exchange rate of 1.9 CAD/GBP gives us $633,333.33.

A Canadian Firm Acquires a British Firm That Will Generate