Finance Question

FIN561 Week 5 Homework SOLUTION (50 points) 1 (10 pts) Why do assets recorded on the books at historical cost distort a target company’s cash flow estimates when using nominal cash flows and discount rates? Type response here: 2 It’s time to forecast the DCF value of a merger with an international target company! We are researching a merger with an industrial production company in Budapest, Hungary. Hungary’s currency is the forint, referred to as HUF. You have already found some publicly available information, listed below. Now, to find the DCF value, you need to compute the following. a. (15 pts) Using the growth rate, forecast real and nominal free cash flows (FCFs) in HUF using Approach A from your text. Ignore the requirement to adjust for forecasted forward exchange rates. Hungarian Forint (HUF), in thousands Real FCF 2020 (actual) 2021 2022 2023 2024 30,000 Real Terminal Value Hungary forecasted real growth rate Hungary forecasted inflation rate 7.4% 5.1% 3.8% 3.5% 2.5% 2.5% 2.3% 2.3% b. (5 pts) Convert HUF nominal currency figures to USD. Exchange Rate: c. 1 USD = 313.15 HUF or 1 HUF = 0.003193 USD (15 pts) Find the USD DCF value using the appropriate WACC rate. US inflation rate 5.0% 3.0% 2.5% USD real WACC: 6.0% Hungary Risk Premiums: Target industry risk premium: Local equity market risk premium: Political risk premium: 0.8% 4.2% 0.9% 2.5% (5 pts) Proper grammar, full sentences, correct spelling and punctuation, and a neat and professional format with clearly labeled answers are required. et company’s pest, Hungary. h flows (FCFs) in HUF 2025 625,000 3.3% 2.5% 2.5% d a neat and professional