Cost of equity of Nextel Peru is calculated by taking the average of available market return data of Peru and that is 1.725%, moreover its risk free rate is taken as a daily yield on 28thMarch 2013, and it is 5.05%, then it is multiplied by beta that is 0.65 then we add the number with risk free rate of 5.05% and at last we get 2.90% as cost of equity using market return of Peru.
After finding the cost of equity, it is necessary to calculate the asset beta of the company for evaluating the unsystematic risk which can be diversified by controlling the asset beta of the company or taking the asset beta which is the lowest. Asset beta calculates the risk exposure of the company with respect to the market risk or unsystematic risk. The beta asset for Nextel Peru is calculated as 0.4812. It is calculated as 0.4961 for the US market and it is 0.57432 for Global market return. This shows the company’s stock is less volatile if we take into consideration the beta asset with Nextel Peru return. (Vance Lessing, 2005)
Moreover, to calculate the cost of capital, the cost of debt is calculated which turns out to be 4.46% for Nextel Peru. The further analysis is to calculate the free cash flows which were growing at the rate of 5.9% that is last quarter available data, is mentioned in the case. Moreover, the WACC is calculated by taking into consideration the CAPM of Nextel Peru with the weights and Cost of debt and it turns out to be 2.67% which is used for the discounting of cash flows. The value after discounting the cash flows to the equity is $260.13 million.(Nick French, 2005)
By looking at the above factors, we can conclude that the NII Holdings is losing its market share and revenues due to tough competition in the market which results in the inefficiency and ineffectiveness of the company.The company is not able to sustain its profits and has incurred aloss of $765 million in the year 2012. Nextel Peru is performing better and it has the cost of equity of 2.9% and cost of debt is 4.46%. Both numbers were used in thecalculation of WACC, aweighted average of cost of capital and I have used the tax rate of 42%.
Moreover,the tax rate is 42%, that company paid in 2010, I have taken the same tax rate to adjust the cost of debt for calculating the weighted average of cost of capital calculation.
NII holdings should analyze the market conditions which need to be controlled by taking corrective measures and using the appropriate strategies of price cuts and attracting more customers.The discounted cash flows to the equity after deducting the capital expenditures is around $260.13 million which provides an attractive option for its investors. So, it is recommended to accept the purchase price of 400 million dollars as the company has more growth opportunities and global presence……………………
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