Question 21.FSE.10: Illinois Co. (of the United States) and Franco Co. (based in...
Illinois Co. (of the United States) and Franco Co. (based in France) are separately considering the acquisition of Podansk Co. (of Poland). Illinois Co. and Franco Co have similar estimates of cash flows (in the Polish currency, the zloty) to be generated by Podansk in the future. The U.S. long-term risk-free interest rate is presently 8 percent, while the long-term risk-free rate of the euro is presently 3 percent. Illinois Co. and Franco Co. expect that the return of the U.S. stock market will be much better than the return of the French market. Illinois Co. has about the same amount of risk as a typical firm in the United States. Franco Co. has about the same amount of risk as a typical firm in France. The zloty is expected to depreciate against the euro by 1.2 percent per year, and against the dollar by 1.4 percent per year. Which firm will likely have a higher valuation of the target Podansk? Explain.
Franco Co. will offer a higher bid because its existing valuation of Podansk should be higher (since its risk-free rate is much lower).