What is carambola worth-the honduran lempira

Question

Assignment:

Q1: Carambola de Honduras

Slinger Wayne, a U.S.-based private equity firm, is trying to determine what it should pay for a tool manufacturing firm in Honduras named Carambola. Slinger Wayne estimates that Carambola will generate a free cash flow of 13 million Honduran lempiras (Lp) next year (2013), and that this free cash flow will continue to grow at a constant rate of 8.0% per annum indefinitely

A private equity firm like Slinger Wayne, however, is not interested in owning a company for long, and plans to sell Carambola at the end of three years for approximately 10 times Carambola's free cash flow in that year. The current spot exchange rate is Lp14.80/$, but the Honduran inflation rate is expected to remain at a relatively high rate of 16.0% per annum compared to the U.S. dollar inflation rate of only 2.0% per annum. Slinger Wayne expects to earn at least a 20% annual rate of return on international investments like Carambola

a. What is Carambola worth if the Honduran lempira were to remain fixed over the three year investment period?

b. What is Carambola worth if the Honduran lempira were to change in value over time according to purchasing power parity?

Assumptions		Values
Expected free cash flow in 2013		13,000,000
Expected growth rate in free cash flow		8.00%
Assumed sale multiple of FCF in year 3		10
Spot exchange rate, Lempiras/$ (2002)		14.80
US dollar inflation rate		2.0%
Honduran lempira inflation rate		16.0%
Slinger Wayne required return (annual rate)		20.0%
		0	1	2	3
a) Carambola's value if exchange rate fixed		2012	2013	2014	2015
Carambola's expected free cash flow (Lp)
Expected sale value in year 3
Total expected free cash flow (Lp)
Expected exchange rate (Lp/$)		14.8000	14.8000	14.8000	14.8000
Carambola's expected FCF in US$
Present value factor		1.0000	0.8333	0.6944	0.5787
Present value of expected FCF in US$
Cumulative present value in US$
		0	1	2	3
b) Carambola's value assuming PPP		2012	2013	2014	2015
Carambola's expected free cash flow (Lp)
Expected sale value in year 3					-
Total expected free cash flow (Lp)
Expected exchange rate (Lp/$)		14.8000	16.8314	19.1416	21.7688
(PPP: spot * (1+inf in Lp) / (1 + inf in $)
Carambola's expected FCF in US$
Present value factor		1.0000	0.8333	0.6944	0.5787
Present value of expected FCF in US$
Cumulative present value in US$

Q2: Natural Mosaic

Natural Mosaic Company (U.S.) is considering investing Rs50,000,000 in India to create a wholly owned tile manufacturing plant to export to the European market. After five years the subsidiary would be sold to Indian investors for Rs100,000,000. A pro forma income statement for the Indian operation predicts the generation of Rs7,000,000 of annual cash flow, is listed below.

The initial investment will be made on December 31, 2011, and cash flows will occur on December 31st of each succeeding year. Annual cash dividends to Philadelphia Composite from India will equal 75% of accounting income.

The U.S. corporate tax rate is 40% and the Indian corporate tax rate is 50%. Because the Indian tax rate is greater than the U.S. tax rate, annual dividends paid to Natural Mosaic will not be subject to additional taxes in the United States. There are no capital gains taxes on the final sale. Natural Mosaic uses a weighted average cost of capital of 14% on domestic investments, but will add 6 percentage points for the Indian investment because of perceived greater risk. Natural Mosaic forecasts the rupee/dollar exchange rate for December 31st on the next six years are listed below.

What is the net present value and internal rate of return on this investment?

Assumptions		Values		Assumptions		Values
Initial investment in India (Rs)		50,000,000		Dividend distribution per year		75.00%
Indian corporate tax rate		50.00%		US corporate tax rate		40.00%
Sale price in year 5 (Rs)		100,000,000		India risk premium to WACC		6.00%
Natural Mosaic's WACC		14.00%
Pro forma income and cash flow		0	1	2	3	4	5
(December 31st)		2011	2012	2013	2014	2015	2016
Sales revenue			30,000,000	30,000,000	30,000,000	30,000,000	30,000,000
Less cash operating expenses			##########	##########	(17,000,000)	(17,000,000)	(17,000,000)
Gross income			13,000,000	13,000,000	13,000,000	13,000,000	13,000,000
Less depreciation expenses			(1,000,000)	(1,000,000)	(1,000,000)	(1,000,000)	(1,000,000)
Earnings before interest and taxes			12,000,000	12,000,000	12,000,000	12,000,000	12,000,000
Less Indian taxes at 50%			(6,000,000)	(6,000,000)	(6,000,000)	(6,000,000)	(6,000,000)
Net income			6,000,000	6,000,000	6,000,000	6,000,000	6,000,000
Add back depreciation
Annual cash flow
Initial investment		##########
Terminal value, sales							100,000,000
Cash flows for discounting
Present value factor	20%	1.0000	0.8333	0.6944	0.5787	0.4823	0.4019
Present value of cash flow
NPV of India investment (project view)
IRR of Indian investment (project view)
Cash inflows & outflows to US		2011	2012	2013	2014	2015	2016
Initial investment (Rs)		##########
Dividends received in the US (Rs)
Sales value (Rs)
Net cash flows to parent after-tax (Rs)
Expected exchange rate (Rs/$)		50.00	54.00	58.00	62.00	66.00	70.00
Net  cash flows to parent after-tax (US$)
Present value factor	20%	1.0000	0.8333	0.6944	0.5787	0.4823	0.4019
Present value of cash flow
NPV of cash flows (parent viewpoint)
IRR of cash flows (parent viewpoint)