Case Studies in Finance

Paginas Amarelas

NAME: Lingxi Zhang

STUDENT ID: 25743465

2015.08.11

Summary
In order to estimate the capital costs of emerging markets, we use the case “PAGINAS AMARELAS” to discuss the method to calculate the value of the capital and the problems we met during the calculation. In the case, Brazil, Argentina and Chile were chosen as the representatives of Paginas Amarelas‘ operation countries. All the information and data we used are based on the real operation situations among these three countries.
Introduction
Basil Investimentos, an industrial group with forecast sales of $1.5 billion, asked J.P. Morgan & Company to restructure its business in telephone-directory in 1996. We will use discounted cash flow(DCF) method to value the business.

1. Why is Brasil Invetimentos’ telephone-directory business being valued in U.S. dollars? Why not in local currencies?
Determining the valuation
When estimating the valuation of Brasil Invetimentos’ telephone directory business, Lopez had considered two important factors first, cost of debt and cost of equity.
The cost of debt is needed when determining the WACC. It can be seen from Lopez’s research that operations in three countries are all inclined to borrow in the local markets. Lopez had the relationship in the credit offices which could help him to access the data that three countries would like to borrow at U.S dollar rates.
The cost of equity can be calculated via CAPM method. However, the determining factor is which parameter should be chosen, the local market ones or the U.S. market ones. Since there is a big difficulty that the risk-free rate of each country is hard to be accessed. In addition, the equity-risk premium

2. Why is J.P. Morgan not estimating local discount rates?
3. What are the U.S. dollar WACCs for the operations in Argentina, Brazil and Chile?