Nextel Peru: Emerging Market Cost of Capital Case Solution & Answer


To justify the expected enterprise value of Nextel Peru, various financial techniques and methods are used to determine the comparable prices related to the actual results. Therefore, the first process would be to project the next year’s financial results that would induce with the expected free cash flows. Secondly, the rate of return would consider being an important factor to identify the expected enterprise value of the company. For that, a risk measurement, market risk premium, as well as risk-free rate, should be involvedto come with a final value. The net present value is the difference of net cash inflows and net cash outflows. So, this value would not be justifiable to match with the fair price.

The addition of terminal value to the net present value is important to calculate the enterprise value of the company because this value includes all the assets and liabilities involved in the business operations. Thus, these particular factors are most important for an analyst and the acquirer to make sure that it would match with the expected terms and conditions overtime. There are several steps that would be able to consider a final value of an enterprise. These are given below:

Base Case

The baseline scenario involves the actual calculations of the individual variables that would allow generating the net business value of the particular year. It consists of the process that starts with the projected income statement (2013) then calculates the rate of return based on the assumptions and the actual country risk premiums. Moreover, a pattern of free cash flows is involved in concluding the net present value and the terminal value of the company.

Furthermore, the results also indicate the factors that would change the value if the certain circumstances would occur shortly or if the changes would take impact in the year in which the company would be acquired by Entel. Therefore, under historical perspective, the expected growth rate of revenues would be 8.90% and consider for the next consecutive years. All other components are calculated through the percentage ofrevenues. Thus, the final values indicate stable earnings of the company as compared to the negative flow in the past year.

The relative standard deviation is determined by dividing the variability of the country’s stock returns with the US market returns. It indicates that 1.89 % volatility is good for the industry and could manage the stock’s valuation of certain industry properly. The standard deviation of debt premiums identifies the minimum variability that would be better for the company’s future holdings to minimize the systematic risk.

Default riskis calculated by taking differences between the spreads of US with Peru. Therefore, the country risk premium shows domestic premium under which the company would generate the required rate of return. It would then add to the US equity premium to find out the adjusted premium that would induce in the formula of therate of return.

With a risk-free rate of 4.95%, the capital asset pricing model is calculatedby considering the average beta of theLatin American region…………………

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