Paginas Amarelas Case Study
Table of Contents
1 Introduction 2
2 Determining the Medium and Long Term Growth Rates 4
2.1 Growth in the Telephone Directory Industry 5
2.1.1 Competition 6
2.1.2 Demand for Telephone Lines 9
2.1.3 A Short Summary of the Growth Prospects in the Region 10
2.2 Estimation of the Growth Rates for Argentina 11
2.3 Estimation of the Growth Rates for Brazil 12
2.4 Estimation of the Growth Rates for Chile 13
3 Calculating the Cost of Capital 13
3.1 The Godfrey and Espinosa (1996) Model 14
3.1.1 Determining the Risk Free Rate 15
3.1.2 Determining βadj 15
3.1.3 Determining the Market Risk Premium 17
3.1.4 Determining the Credit Spread 17
3.1.5 Calculating the Cost of Capital 18
3.1.6 Criticisms of the Godfrey and Espinosa (1996) Model 19
4 Determining the Cost of Debt 20
5 Calculating WACC 20
6 Calculating the Present Value of Paginas Amarelas 21
6.1 Valuing the Argentinean Operations 21
6.2 Valuing the Brazilian Operations 22
6.3 Valuing the Chilean Operations 22
6.4 The Present Value of the Operations of Paginas Amarelas 23
7 Conclusion 25
8 Appendix A 27
9 Appendix B 28
10 References: 29
1 Introduction
The aim of this case study is to determine the value of Paginas Amarlas, and advise Brasil Investimentos what the appropriate action would be, given the information available to them in 1996. Expected future events and forecasting techniques, together with the company performance results are used to perform appropriate valuations. The options available to Brasil Investimentos would be the sale or restructuring of Paginas Amarelas.
In order to value Paginas Amarelas, future cash flows would need to be projected, a long run perpetual growth rate would need to be determined and the weighted average cost of capital (WACC) would need to be calculated using the cost of debt and the cost of equity. The future cash flows have been projected by Juan Lopez , but the perpetual growth rate of free cash flows after 2004 needs to be determined. An analysis
1 Introduction 2
2 Determining the Medium and Long Term Growth Rates 4
2.1 Growth in the Telephone Directory Industry 5
2.1.1 Competition 6
2.1.2 Demand for Telephone Lines 9
2.1.3 A Short Summary of the Growth Prospects in the Region 10
2.2 Estimation of the Growth Rates for Argentina 11
2.3 Estimation of the Growth Rates for Brazil 12
2.4 Estimation of the Growth Rates for Chile 13
3 Calculating the Cost of Capital 13
3.1 The Godfrey and Espinosa (1996) Model 14
3.1.1 Determining the Risk Free Rate 15
3.1.2 Determining βadj 15
3.1.3 Determining the Market Risk Premium 17
3.1.4 Determining the Credit Spread 17
3.1.5 Calculating the Cost of Capital 18
3.1.6 Criticisms of the Godfrey and Espinosa (1996) Model 19
4 Determining the Cost of Debt 20
5 Calculating WACC 20
6 Calculating the Present Value of Paginas Amarelas 21
6.1 Valuing the Argentinean Operations 21
6.2 Valuing the Brazilian Operations 22
6.3 Valuing the Chilean Operations 22
6.4 The Present Value of the Operations of Paginas Amarelas 23
7 Conclusion 25
8 Appendix A 27
9 Appendix B 28
10 References: 29
1 Introduction
The aim of this case study is to determine the value of Paginas Amarlas, and advise Brasil Investimentos what the appropriate action would be, given the information available to them in 1996. Expected future events and forecasting techniques, together with the company performance results are used to perform appropriate valuations. The options available to Brasil Investimentos would be the sale or restructuring of Paginas Amarelas.
In order to value Paginas Amarelas, future cash flows would need to be projected, a long run perpetual growth rate would need to be determined and the weighted average cost of capital (WACC) would need to be calculated using the cost of debt and the cost of equity. The future cash flows have been projected by Juan Lopez , but the perpetual growth rate of free cash flows after 2004 needs to be determined. An analysis
References: Bruner, R; (2003), Case Studies Inf Finance, 4th Edition, International Edition, McGraw-Hill. Carlton, D and Perloff, J; (2000), Modern Industrial Organisation, 3rd Edition, Pearson Addison-Wesley. Erb C, Harvey C, Viskanta T; (1995), Country Risk and Global Equity Selection, The Journal of Portfolio Management, Winter. Estrada, J; (2000), The Cost of Equity in Emerging Markets: A Downside Risk Approach, Emerging Markets Quarterly, 4 (Fall 2000), 19-30, Spain. Godfrey, S and Espinosa, E; (1996), A practical Approach to Calculating Costs of Equity for Investment in Emerging Markets, Journal of Applied Corporate Finance (Fall 1996). Sabal, J; (2001), The Discount Rate In Emerging Markets: A Guide, The Journal of Applied Corporate Finance, Vol 16 No. 2-3. Available on: www.sabalonline.com/website/uploads/TDPEsBalas2002paper.pdf, Accessed on: 27/03/2006.