EMERGING MARKET COST OF CAPITAL Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

EMERGING MARKET COST OF CAPITAL Case Study Solution

The NII Holdings is operating in many countries like Brazil, Peru, USA, Chile, Argentina and Mexico. The financial performance of the company is poor due to the loss of $765 million in the year 2012 which occurred due to tight competition in the market. Moreover, the company had the 75% debt to equity ratio and was focusing more on debt financing which resulted in a high financial cost for the company. The cost of equity is calculated by using CAPM model and the best fit model was selected based on the lowest risk and high return. The systematic and unsystematic risks of Nextel Peru have been the lowest. Beta (Systematic risk) is 0.65. The company has cost of equity of 8.772%. Moreover, the free cash flows to the equity are providing indication that the company should not accept the purchase price of $400 million because Net present value is $580 million.

Introduction

NII Holdings is a US based business with the center of operations in Latin America. After some time, the company expanded its operations to Chile, Argentina, Mexico and Brazil. Company struggled with change as well as poor competitive position has led to weak financial performance of the company. In 2012, company reported a loss of $765 million. The company had competitive advantage of providing superior customer service and care by directly connecting with the people with push-to-talk service. On the other hand, Nextel Peru is performing very well. From the financial perspective, Nextel Peru accounted for 6% of the company’s revenues and 15% of company’s customer base. In 2012, Nextel Peru’s marketing and sales expenditure was increased by 14% with 8% increase in the cost of service which resulted in the reduction in EBITA ratio by 14%.

Integration from global capital markets

It was mentioned in the case that the company’s operations were integrated with the holding company’s operations which allowed Nextel Peru to maximize its returns and capture more market share. The inflation rate is driven by the economy which is the lowest and it affects the company in calculating the cost of debt. Moreover, the factors like changing demand and high competition also decide the company’s integration and segmentation from the capital market. The growth rate of inflation is lower in Peru as compared to other countries. However, GDP growth rate is very high as compared to USA economy which shows that economy is growing and in the end, it will benefit the operations of Nextel Peru. The expectations of economic growth rate are relatively weak for the company as its forecasting had failed for the last quarter. Subscribers for Peru are segmented and their number is reduced because of the poor performance.

EMERGING MARKET COST OF CAPITAL Harvard Case Solution & Analysis

Estimation of Country’s Risk Premium:

GDP and inflation rate can affect the country’s risk premium and also helps to find the market return of the country. Market’s risk premium is also effected by the risk free rate and market return of the country. Macroeconomic variables affect the risk premium and if we ignore macroeconomic variable inflation and growth rate then it will not show the true and fair estimation.

Findings and discussion

Cost of equity (Market return of Peru)

Cost of equity of Nextel Peru was calculated by taking the average of available market return data of Peru. It was 1.725%, moreover its risk free rate was taken as a daily yield on 28^th March, 2013, and it was 5.05%, then it was multiplied by beta that was 0.65, at last the number was added with the risk free rate and we got the cost of equity of 2.904%. (Ezzell, 1980)

Cost of equity (Market return of Latin America)

Cost of equity for Latin America was calculated by the same CAPM formula mentioned above. The average market return of Latin America was 0.99% with the risk free rate of 3.09% that was multiplied by the beta of 0.666, at last we added the number in the risk free rate of 3.09 and resulted in to the cost of equity of 1.69%. It was lower than the cost of equity by return of Nextel Peru...............

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