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Chap19 Pbms MBF12e

# Chap19 Pbms MBF12e - Problem 19.1 Trefica de Honduras Texas...

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Problem 19.1 Trefica de Honduras a. What is Trefica worth if the Honduran lempira were to remain fixed over the three year investment period? b. What is Trefica worth if the Honduran lempira were to change in value over time according to purchasing power parity? Assumptions Values Expected free cash flow in 2003 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% Texas Pacific required return (annual rate) 20.0% 0 1 2 3 a) Trefica's value if exchange rate fixed 2002 2003 2004 2005 Trefica's expected free cash flow (Lp) 13,000,000 14,040,000 15,163,200 Expected sale value in year 3 151,632,000 Total expected free cash flow (Lp) 13,000,000 14,040,000 166,795,200 Expected exchange rate (Lp/\$) 14.8000 14.8000 14.8000 14.8000 Trefica's expected FCF in US\$ \$878,378 \$948,649 \$11,269,946 Present value factor 1.0000 0.8333 0.6944 0.5787 Present value of expected FCF in US\$ \$731,982 \$658,784 \$6,521,959 Cumulative present value in US\$ \$7,912,725 0 1 2 3 b) Trefica's value assuming PPP 2002 2003 2004 2005 Trefica's expected free cash flow (Lp) 13,000,000 14,040,000 15,163,200 Expected sale value in year 3 151,632,000 Total expected free cash flow (Lp) 13,000,000 14,040,000 166,795,200 Expected exchange rate (Lp/\$) 14.8000 16.8314 19.1416 21.7688 (PPP: spot * (1+inf in Lp) / (1 + inf in \$) Trefica's expected FCF in US\$ \$772,367 \$733,483 \$7,662,110 Present value factor 1.0000 0.8333 0.6944 0.5787 Present value of expected FCF in US\$ \$643,639 \$509,363 \$4,434,091 Cumulative present value in US\$ \$5,587,094 Texas Pacific, a U.S.-based private equity firm, is trying to determine what it should pay for a tool manufacturing firm in Honduras named Trefica. Texas Pacific estimates that Trefica will generate a free cash flow of 13 million Honduran lempiras (Lp) next year (2003), 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 Texas Pacific, however, is not interested in owning a company for long, and plans to sell Trefica at the end of three years for approximately 10 times Trefica’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. Texas Pacific expects to earn at least a 20% annual rate of return on international investments like Trefica.

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Problem 19.2 Philadelphia Composite 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% Philadelphia Composite's WACC 14.00% Pro forma income and cash flow 0 1 2 3 4 5 (December 31st) 2002 2003 2004 2005 2006 2007 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) (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 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 Annual cash flow 7,000,000 7,000,000 7,000,000 7,000,000 7,000,000 Initial investment (50,000,000) Terminal value, sales 100,000,000 Cash flows for discounting (50,000,000) 7,000,000 7,000,000 7,000,000 7,000,000 107,000,000 Present value factor 20% 1.0000 0.8333 0.6944 0.5787 0.4823 0.4019 Present value of cash flow (50,000,000) 5,833,333 4,861,111 4,050,926 3,375,772 43,000,900 NPV of India investment (project view) 11,122,042
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