Saltex, a U. S.- based firm, is considering a project in Israel. Its exit policy

Question

Saltex, a U. S.- based firm, is considering a project in Israel. Its exit policy depends on selling its assets to a local firm for Israeli shekel (ILS) 75 million in five years. The firm analyzes the political situation in Israel and assesses a 25 percent probability of not realizing this value because of expropriation or war. The ILS trades for USD 0.25 currently and is not expected to change in value over the next five years. If the firm’s USD- based WACC is 11 percent, estimate the value of insurance coverage for country risk.

Explanation / Answer

Estimated Value ofof insurance Coverage

= 75000000*25%*11% = $ 2062500

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