Execuive Summary for Paginas Amarelas case

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Like what Mr. Lopez had found, there are some valuation problems to evaluate Paginas Amarelas. We cannot find any relevant local “pure-play” competitor in the telephone directory industry since the companies are either too small or own other business, which increased the difficult for us to calculate the beta which is used to estimate the required return by using CAPM. When calculating the cost of equity, Mr. Lopez cannot determine the risk-free rate since he was not convinced that he would be able to find a security with no default risk from Argentina, Brazil, and Chile. Besides, the market risk premium was questionable because of the inefficiency of the local equity markets. In addition, Brasil Investimentos’ executives had stated that the country operations only borrowed money at the country level. All three local operations were relatively small to issue debt independently in the international markets. All the cash flows are denominated in US dollar because of the high-inflationary environments in these three countries. The discount rate should match the currency of the cash flow, so it should be denominated in US dollar also. We prefer to use US proxy and adjust for country risks to estimate the required rates of return for each country. The reason for J.P. Morgan did not discount the local cash flows at a local required rate of return is because many valuation problems exist in using local parameters to estimate the required rate of return. Some of these problems have been indicated in the first paragraph above. In fact, we always do not generally use this approach because we need to estimate the “adjusted factors” that would correctly reflect the risks offered by equity investment in the local areas which will bring additional questions to us. In order to calculate the beta, we need to choose the market proxy in US and to estimate the unleveled

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