A firm considering foreign expansion must first decide which markets to enter, when to enter them, and on what scale. Then the firm must decide on the entry mode. The firm's strategy, product, and competition all play parts in making that decision. When a firm's competitive advantage is based on technological competence, a wholly owned subsidiary will often be the preferred entry mode because it reduces the risk of losing control over that competence. A wholly owned subsidiary is also beneficial when the firm seeks global strategic coordination, seeking to use profits from one country to support competitive attacks in another. Once a firm has decided to establish a wholly owned subsidiary, the choice will be between creating a greenfield venture and acquiring an existing firm or operation.

Read the overview below and complete the activities that follow.

The choice between acquisitions and greenfield ventures is not an easy one. The firm must make a series of decisions, and each decision will help it make the appropriate choice. Answer the questions and then decide if the strategy presented is the correct one.

Your firm manufactures and sells a line of telecommunications equipment, and you have decided this is the time to expand into foreign markets. You have grown your domestic business by buying out struggling businesses and leveraging their products with your management talent. You have gained a reputation for leaving the corporate culture intact in those businesses. Your management team has examined several countries and selected a developed country in Western Europe as a logical target. You believe your domestic competitors are also looking at foreign markets, and you feel you must act sooner rather than later to maintain your competitive edge at home and abroad. While your product is not new to the world, you have had success domestically by appealing to specific niches often ignored by competitors.

1. By acquiring an established enterprise, a firm can rapidly .

Select a response. build its presence in the foreign market, increase its dominance in supply chains and manufacturing processes, repay the funds it borrowed to expand its markets

2. Firms will make acquisitions to , which is particularly important in markets that are rapidly globalizing.

Select a response. maximize the exposure to risk and therefore profit, avoid government regulations on the environment and labor, preempt competitors

3. Many acquisitions fail because .

Select a response. the entrenched management moves too quickly to capitalize on the new management approaches, anticipated synergies run into roadblocks and take longer to realize than planned, the firm spends too long in due diligence and the opportunities evaporate

4. The big advantage of is that it gives the firm a much greater ability to create the kind of organizational culture and operations it wants.

Select a response. acquiring a single firm in a foreign market, a greenfield venture in a foreign country, acquiring a number of smaller firms and combining them into one large firm

5. If a firm is entering a country where there are no incumbent competitors, is preferred.

Select a response. realizing something is wrong and staying away from that market, a limited partnership acquisition, a greenfield venture

Sabrina gupta, an investment advisor with a major brokerage firm, was examining wal-mart stores, inc. (wal-mart) stock and its valuation. gupta wondered whether to recommend the stock to any of her new clients or to existing clients who did not currently have wal-mart in their portfolios.her key task was to use an intrinsic value approach to price the shares and to then compare the resulting price with the price at which the stock was traded in the market. gupta wanted to use alternative valuation methods and assumptions to produce intrinsic value estimates for wal-mart stock.she was interested in seeing if the alternative methods would point to a consensus regarding the valuation of the stock and to see if the valuations suggested an investment opportunity given the current market price. methods she contemplated to use were: multi-stage growth modelprice earnings multiplemost valuation methods gupta considered required a common set of inputs: future cash flows to wal-mart investorsgrowth rate of future cash flowsdiscount factor or required rate of return by wal-mart investorsgupta gathered data to determine each of the above.gupta thought that dividends to wal-mart shareholders would adequately capture the cash flows to wal-mart shareholders; she also thought that this approach would simplify her task and she would revisit more complex valuation models if she felt the need.gupta thought that capm would provide her a relatively reliable estimate of the required rate of return. capm based required rate of return can be estimated by using a risk free rate, systematic risk of the firm and equity market risk premium. gupta thought that in a valuation exercise that involve long term cash flows, 10-year government bond yield would be an appropriate risk free rate of return estimate. she checked the 10 year note rate and found out that it was about 3.68%. gupta searched for wal-mart beta in bloomberg. bloomberg estimates betas by regressing the s& p 500 returns on the firm returns over the past two years and arrives at a “raw” beta estimate. bloomberg makes an adjustment in raw beta based on some academic research. gupta is confident that bloomberg adjustment is justified and she uses wal-mart beta estimate of 0.66 in her analysis.while gupta is aware of the importance of emrp assumption, she thinks that bloomberg’s historical estimate of 5.05% is a safe assumption. she is aware of the fact that some studies suggest a larger risk premium of approximately six per cent, while others suggest a much lower forward-looking premium of less than four per cent. she is mindful of the arbitrariness of her assumption, and she takes a note to revisit this issue if her valuations produce unreasonable estimates.anticipated dividend growth (g) is often estimated in a variety of ways.first, observed historical dividend growth can be assumed to continue in a perpetual fashion.second, future dividend growth can be estimated on the basis of recent estimates of analysts.gupta noted that the consensus annual wal-mart dividend for fiscal year 2011 was $1.21, and one respected analyst had estimated the expected constant dividend growth (in perpetuity) at approximately 3%.as the chart suggests, both earnings and dividend growth rates are declining but they seem to be higher than the “respected analyst’s” estimates. gupta decides to use several alternative perpetual growth assumptions to see the impact on price. since gupta decided to use variants of dividend discount model (ddm), she checked the anticipated earnings for 2011. analyst’s estimates suggested $4.10 earnings per share. gupta decided to use 10% growth rate from 2011 to 2012 and assumed a steady decline to 3% in 13 years (until 2024) where the perpetual growth rate of 3% resumes. she also assumed that walmart will increase its dividend payout ratio from 30% to 55% from years 2012 to 2024. you are asked to reproduce gupta’s analysis of multi-stage growth model and double check her valuation by using an earnings multiple. you have all the data you need to conduct the multi stage discounted growth model analysis, but you will need to do some research about the multiples valuation.