## Nextel Peru- Emerging Market cost of capital Case Study Help

Nextel Peru’s asset beta and the required return on assets

The capital asset pricing model (CAPM) approach is used to calculate the asset beta and the required rate of return on the assets,in, which the risk free rate of return is calculated by taking an average of the daily yields of Peruvian market for 30 year rates, which is 4.95 percent and the market risk premium is 10.62 percent that is calculated for the Peru equity market risk premium. The MSCI Latin equity beta of 0.72 is used for calculating the cost of equity or unlevered cost of capital. The required rate of return or unlevered cost of capital of 12.55 percent is calculated by multiplying the market risk premium with the beta & then adding it into the risk free rate of return to get the 12.55 required rate of return or unlevered cost of capital. The calculations can be seen in the Appendix B.

Free cash flow analysis of Nextel Peru

In reference to the information provided in the case; it could be stated that Peru is somewhat mature company on the ground that it competes with the larger market competitors, with more resources and it hasa significant nationwide holdings of 800 MHz spectrum. Additionally, it accounted for 6 percent of the operating revenue of NII holdings and 15 percent of the subscriber base of firm, during the year 2012. The positive earnings of the company demonstrates that the company would keep generating positive cash flows in the near future.

In order to calculate the discounted free cash flows for Nextel Peru by discounted free cash flow (DCF) approach; the depreciation expense is added back in its net earnings and capital expenditures are deducted to come up with the free cash flow for each projected year. Using the DCF method, the cash flows of the company is positive in the year 2013. To calculate the terminal value; the long run growth rate is assumed to be 6.5%. The terminal value of the companyamounts to $331962000, which is then discounted back with the cost of capital. The discounted free cash flow of the company amounts to $11748 in 2013, whereas the net present value orenterprise value is $384363000, which falls within the range between $397 million and $425 million.(Edleson, 2018).The forecast of the earnings seems to be reasonable as it are forecasted on the basis of the average of the growth rate of previous years, and all other components are calculated through the percentage ofrevenues, due to which Entel could agree to buy the company on account of the growth prospects and positive future earnings.

Assessment of Entel’s proposed deal

The enterprise value is calculated using the Discounted Cash Flow Method (DCF) with an intent of suggesting Entel the acquiring price of Nextel Peru. With 4.95 percent risk free rate of return and 10.62 percent market risk premium as well as an average beta of the Latin American region; it is analyzed that the company would generate 12.55 percent rate of return and would involve the similar rate after acquiring Nextel. The positive net present value shows that the project would be feasible and would generate healthy profit returns. After taking the sum of the net present value and terminal value; the enterprise value of $348 million seems to be a fair value in 2013 for acquiring Nextel, which falls within the price range between $397 million and $415 million.

Conclusion

The NII Holdings - a holding organization of Nextel Communications is the parent organization of Nextel Peru. A financial standing of Nextel Peru is better than the parent company. Entel – a Chilean company is contemplating to acquire Nextel Peru for the price ranging between $397 million and $415 million. A free cash flow using DCF method, shows that the fair price value is $384 million. The growth rate of 6.5 percent and the unlevered cost of capital of 12.55 percent is incorporated in calculating the enterprise value. The detailed analysis shows that purchasing the Nextel Peru for $384 million would be a feasible decision for the company................................

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