Paginas Amarelas Harvard Case Solution & Analysis

Brasil Investimentos wants to analyze the value of its Paginas Amarelas and J.P. Morgan's Latin America M&A new associate Juan Lopez has given the responsibility for the valuation of the Paginas Amarelas. The Paginas Amarelas subsidiary of Brasil Investimentos operates in three countries of Latin America that include Argentina, Brazil, and Chile. Moreover, he converted all the cash flows of each country into Dollars and also the present value of the countries has been computed for various discount rates. However, in order to determine the valuation of Argentina, Brazil, and Chile, Growth rate Cost of capital, cost of debt, WACC and present value evaluation of each country is required.

There some problem in the valuation of these countries since Juan Lopez has selected Discounted Cash flow model so, while determining the cost of equity for the WACC he has some obstacles. Firstly, he faced problems in determining the risk –free rate for each country due to the reason that the government bonds of Argentina, Brazil, and Chile are free of risk and also government of these countries had defaulted on interest and debt payments in the current years. Secondly, estimating the value of equity risk premiums as each of these countries has inadequate historical information.

Thirdly, the beta cannot be calculated properly as there is no competitor of the Paginas Amarelas in the Argentina, Brazil, and Chile due to the reason that either competitors are conducting many types of business or are too small to be comparable. Furthermore, in an international market each country does not issue debt security independently is another issue while determining cost of debt. The cash flows are dominated in each local country   currency that is Argentina in pesos, Brazil in reals and Chile in pesos. While the discount rate should be dominated in US Dollar.

The growth rate of FCFs for each country is calculated in US Dollar. The average growth rate of free cash flows in Argentina, Brazil, and Chile that is used by the Juan Lopez during the time period 1997-2004(Exhibit 1).

Moreover, The Risk free rate in the United State is taken as the risk free rate for the calculation as the currency that is used is in US dollar. The risk free rate that is used for the valuation is the 10 years US T-bills with the yield to maturity rate of 6.8%.This is due to the reason that future cash flows are calculated for the 8 years and it may be unsuitable to take shorter term T-bond yield to maturity rate. As well, it would be helpful in determining the long-term benefits of the investments for the investors in the Paginas Amarelas.

However, in order to determine the cost of capital the adjusted beta of all the local markets have been determined and each country adjusted beta is multiplied by the 0.6 that is country beta in order to avoid the double-counting double risk. The adjusted beta for the 1.17 for Argentina, 1.45 for Brazil and 0.39 for Chile (Exhibit 2).

The equity market premium of US (S&P Index) has been taken as the market risk premium for each country that is 5.5%. The Spread of Argentine Republica 8.375% Government Bonds spread over US Treasuries is 4.40% and the bond with the maximum is used in order to uphold the accuracy. In addition, Brazilian Cbonds Government Bonds spread over the US Treasuries is 3.80% as reason of using the Cbonds is that they are utmost comparable with the US Treasury bonds. The Chilean High -Grade Corporate Bonds spread over the US Treasuries is 1.10% and for determining spread bond with  the highest spread is selected (Exhibit 3).

The Cost of Capital (required rate of return) is determined for each country and the valve of cost of capital for each country is 17.66% for Argentina, 18.57% for Brazil and 10.05% for Chile (Exhibit 4). After determining the cost of capital, the cost of debt is calculated for each country as Paginas Amarelas has borrowed locally for each market and it is expected that it will continue in the future so, cost of debt is taken as local borrowing rates. The After-tax rate cost of debts for each country is Argentina 6.37%, Brazil 8.06% and Chile 6.72% (Exhibit 5). However, the value of WACC is determined after evaluating the Cost of Capital and Cost of Debt for Argentina, Brazil, and Chile............................

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This case serves as a basis for student discussion of the assessment required rate of return (ROR) on investment in emerging markets. Associate in Latin America JP Morgan, M & Division (M & A) is assigned to the problem of estimating the telephone directory operations ("paginas amarelas» means "yellow pages") of a large Brazilian conglomerate. All cash flows have been translated into U.S. dollars, and the present values, calculated for discounts. remaining step is to determine the appropriate target return per dollar flows arising in Argentina, Brazil and Chile. prices of capital assets model (CAPM) is used along with the political risk premium and the country beta. Necessary number of relatively light work , resulting in the student time to reflect on the need to assess the various adjustments to the cross-border exchange of profitability.
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by Robert F. Bruner, Mario Wanderley Source: Darden School of Business 26 pages . Publication Date: February 10, 1998. Prod. #: UV0108-PDF-ENG

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