Paginas Amarelas Essay

1811 WordsApr 4, 20128 Pages
Paginas Amarelas 1. What is the valuation problem here? The valuation problem is to calculate the WACC for international projects and find the value of the 3 units within Paginas Amarelas. There have been major changes in political and economic environments in past 5 to10 years and significant increase in international trade. The company operates in high inflation environments, especially in Argentina and Brazil and the effect of Mexico Peso crisis on equity market and currencies in Latin America In what currency are the cash flows denominated? Cash flows are projected in nominal local currency In what currency should the discount rate be denominated? Cash Flows Use US$ for all 3 countries because the others are highly inflationary currencies Exchange rate based on interest rate parity Discount rate should be denominated in US$ Match currency of cash flow To be expressed in terms of a particular currency unit. For example, a bond could be denominated in yen. 2. In this case, why doesn.t JP Morgan discount local cash flows at a local required rate of return? Why not use that approach generally? The study was done under the assumptions that all cash flows have been converted to US dollars, and present values are computed for various discout rates. We used the capital asset pricing model along with a political risk premium and a country market risk, beta. The cash flow is presumed to increase by an average 1% per year vs. previous year, from 2.7 in 1998 to 5.9 in 2005, and decrease to 4% by 2004, for each country; the discount was calculated at the local required rates of return. Was considered also the differences in inflation rates across countries and the estimation of forward exchange rates using parity conditions. (Schedule 6). 3. To complete the estimation of the required rate of return, what other e¤ects should we

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