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Question 8.2: The Eurozone firm DYA will generate one operating cash flow,...

The Eurozone firm DYA will generate one operating cash flow, expected to be €1 million at time 1. From the perspective of U.S. dollars, DYA’s FX operating exposure to the euro is 1 and cost of capital is 8.50%. XYZ Company, a U.S. multinational, is evaluating the acquisition of DYA. Assume {r_f}^\$ = 3\% \ and \ {r_f}^€ = 6\% , the currency beta of the euro is 0.20, and the actual time-0 spot FX rate of 1.50 $/€ is the time-0 intrinsic spot FX rate. Assume the global CAPM RAUIRP condition with GRP^\$ = 5\%. XYZ forecasts that the time-1 spot FX rate will be the intrinsic spot FX rate. (a) Find DYA’s intrinsic business value in euros. (b) Find the expected time-1 intrinsic spot FX rate. (c) Find DYA’s intrinsic business value in U.S. dollars. (d) Show that the intrinsic business values in euros and U.S. dollars are equivalent given the time-0 intrinsic spot FX rate.

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