4.4 Could someone show me the steps to finding these solutions and solving the p

Question

4.4 Could someone show me the steps to finding these solutions and solving the problem, please?

The free cash flows in the table below are estimates for a medium-sized enterprise based in Buenos Aires, Argentina. Your employer is interested in purchasing this firm, and wants you to figure out what it is worth in U.S. dollars. The national currency of Argentina is the peso, and the free cash flow estimates in the table below are all in that local currency (assume that the 2016 cash flow is exactly one year away, and that all cash flows after 2019 grow at 4% forever). As of the beginning of 2016, 1 Argentina peso is worth 7.1 U.S. cents. In the table below are forward one-year interest rates for both Argentina and the U.S. Assume that U.S. dollar cash flows can be discounted at the cost of equity, because the firm in question has no debt. The appropriate risk free rate is 3%, the market risk premium is 7%, and the firm's beta is 1.6. To account for country-specific risk related to an Argentinian investment, analysts in the U.S add 4 percentage points to the CAPM-derived cost of equity. What is this firm worth in U.S. dollars? (U.S.$62.3 million)

Explanation / Answer

Answer:

Formulae Used:

Forward Rate = {Spot Rate X (1 + Interest Rate of Overseas country) / (1 + Interest Rate of Domestic country)

CAPM Cost of Equity = Risk Free Rate + Beta x (Market Rate - Riskk Free Rate) = 3% + 1.6 x 7% = 14.20%

Expected Return for the target Firm = CAPM Cost of Equity + 4% (premium for Argentina Based Firm) = 14.20% + 4% = 18.20%

Now,

The current Worth of the Firm = $ 369,306,173.17

Particulars 2016 2017 2018 2019 Till Perpetuity Free Cash Flows in Peso 521,146,285 526,854,718 628,551,474 745,289,654 Forward Exchange Rate 7.10 (1+0.259) / (1+0.033) = 8.6533 US Cents 8.6336 US Cents 8.7263 US Cents 8.6425 US Cents Free Cash Flows in USD 521,146,285 x 8.6533 / 100 = $ 45,096,351.4799 $ 45,486,528.93 $ 54,849,287.27 $ 64,411,658.34 ($ 64,411,658.34) / (0.1820 - 0.04) = $ 453,603,227.74 Present Value Factor@ 18.20% 0.846 0.716 0.606 0.512 0.512 Present Value of Free Cah Flows $ 38,152,581.62 $ 32,557,259.72 $ 33,213,799.45 $ 32,998,528.54 $ 232,384,003.84

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