Your Assignment
Your assignment is conduct the necessary analysis and write a report addressing the issues raised in the last two paragraphs of the case. Here is the key sentence: "Ultimately, he [Rafael d'Anconia] wanted to understand whether the $400 million purchase price for Nextel Peru was reasonable." Your report should be based on the situation, facts and figures presented in the case and the associated spreadsheet.
The best you will be able to do is come up with a range of scenarios in which the acquisition of Nextel Peru for $400 million would be a good idea and scenarios in which it won't be. What is important is that you follow a correct and internally consistent process.
You will have to make some assumptions or choices in your report. State your assumptions and choices, and provide justification for them.
The value of an asset, Nextel Peru in this case, depends on expected future cash flows and the cost of capital. Many of you have not had managerial finance (MBC 633) where valuation is discussed.
Steps for Analysis
Here are the suggested steps for your analysis:
1. Forecast the expected cash flow for Nextel Peru for the next year (2013). Make sure to use free cash flow (FCF) rather than net income or other measures.
2. Nextel Peru is considered to be a mature company and therefore its future cash flows are expected to grow at a relatively low rate forever. Estimate this growth rate.
3. Decide on a model for the cost of capital. Pay attention to the the locale and the portfolio of the investor and the locale of Nextel Peru. Estimate the risk(s) and the risk premium(s). Calculate the cost of capital.
4. Use the process described in Section2and values from steps 1, 2 and 3 to determine the value of Nextel Peru. Based on this value, conclude whether to pay $400 million for Nextel Peru or not.
5. Since the calculated value in step 4 is based on assumptions about the expected future cash flow, projected growth rate in the cash flows, the model for cost of capital, the risk-free rate, the value(s) of measure(s) of risk and the value(s) of the risk premium(s), do some sensitivity analysis to determine the scenarios in which paying $400 million for Nextel Peru would be a good idea, and scenarios in which it won't be.
Reference -
1. Global Investments by Bruno Solnik and Dennis McLeavey
2. Nextel Peru: Emerging Market Cost of Capital
3. Globalization and International Investing
Attachment:- Assignment.pdf