Foreign investment Decision

The firm you work for , ABC Co., is considering the acquisition of a firm in the Czech Republic and would like your opinion on this. It plans to operate the firm for 3 years and then reevaluate the holding.

Free cash flows are estimated as follows:

* Year 1- 38.63 Czech Koruna (CZK), Year 2- 44.33 M CZK, Year 3- 50.48M CZK
* The third year terminal value is estimated at 375M CZK.

The Czech Koruna's exchange rates is assumed to be .038 USD/CZK for each year. ABC Co. uses a WACC of 13% for its domestic projects. So, the PV of the FCF's for the firm is 363.78 M CZK or $13.82M. The Czech firm has  1,000,000 shares outstanding and a debt to equity ratio of 1:1. Current market price is 185CZK per share.

QUESTIONS:
1. Should ABC Co. make a deal if its policy is to never exceed a 20% premium in any tender offer? Explain.
2. What changes in the analysis or additional analysis do you suggest before a final decision should be made?
3. Using the DCF methodology required in question 1, please take one of your suggestions and reevaluate the buy-out.
Glossary:
DCF= Discounted cash flow valuation
FCF= Free cash flow
WACC= weighted average cost of capital