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Odessa Co., Midland Co., and Roswell Co. are currently valued the same based on future cash flows. However, Odessa obtains supplies in euros but sells in dollars, so it will benefit from an expected long-term depreciation of the euro. Midland has a European subsidiary doing business in euros that remits profits in euros, so it will be hurt by the weaker euro. Roswell does no international business so its valuation remains unchanged.
Odessa Co., Midland Co., and Roswell Co. are currently valued the same based on future cash flows. However, Odessa obtains supplies in euros but sells in dollars, so it will benefit from an expected long-term depreciation of the euro. Midland has a European subsidiary doing business in euros that remits profits in euros, so it will be hurt by the weaker euro. Roswell does no international business so its valuation remains unchanged.
Odessa Co., Midland Co., and Roswell Co. are currently valued the same based on future cash flows. However, Odessa obtains supplies in euros but sells in dollars, so it will benefit from an expected long-term depreciation of the euro. Midland has a European subsidiary doing business in euros that remits profits in euros, so it will be hurt by the weaker euro. Roswell does no international business so its valuation remains unchanged.
35. Valuation of an MNC. Odessa Co., Midland Co., and Roswell Co. are U.S.
firms in the same
industry and have the same valuation as of yesterday, based on the present value of future cash flows of each company. Odessa Co. obtains a large amount of its supplies invoiced in euros from European countries, and all of its sales are invoiced in dollars. Midland has a large subsidiary in Europe that does all of its business in euros and remits profits to the U.S. parent every year. Roswell Co. has no international business. Suppose an event occurs that you believe will cause a substantial depreciation of the euro against the dollar over time, but assume this event will not change the business operations of the firms mentioned. Which firm will have the highest valuation based on your expectations? Briefly explain. ANSWER Odessa Co. will have the highest valuation because it benefits from the expected depreciation over time. Midland would be adversely affected by the euro's depreciation.