A consortium of global telecommunication firms is about to submit a bid to purchase the rights to provide cellular telephone services to central São Paulo. The bid must be submitted, and payment made, if awarded the bid, in U.S. dollars, not in Brazilian real (R\$). The consortium has finalized the following forecasts of cash flows, exchange rates, and potential discount rates.

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Exhibit 15.4 Valuing Semen Gresik Using the U.S. Dollar as the Functional Currency Share Exchange Share Capitalization Date Price (Rp) Rate (Rp/$) Price (US$) (US$) June 19, 1998 9,150 14,500 0.63 374,329,655 July 10, 1998 9,150 14,600 0.63 373,765,753 August 18, 1998 10,775 12,000 0.90 532,644,167 August 28, 1998 10,500 13,000 0.73 432,541,667 The book value of a firm is the value of common stock as recorded on the firm's balance sheet plus the retained earnings (cumulative capital rein- vested from carnings). If the M/B ratio exceeds 1, it implies that the firm's equity is currently valued in excess of what stockholders invested in the firm. Like the P/E ratio, the magnitude of the M/B ratio, as compared to its major competitors, reflects the market's perception of the quality of the firm's earnings, management, and general strategic opportunities. Functional Currency and Valuation The P.T. Semen Gresik case also raises one of the truly international ques tions in valuation, the significance of functional currency of denomination. In Chapter 8 the functional currency of a foreign affiliate was defined as the currency that dominated the economic cash flows of the firm. In the case of Semen Gresik, the Indonesian rupiah may not be the functional currency of either the firm or the industry; the functional currency may be the U.S. dol- lar. If this is the case, it is the interaction of earnings and price in local cur- rency terms (Indonesian rupiah) with the exchange rate of the functional currency (rupiah/dollar) that reflects value. Exhibit 15.4 provides a series of alternative valuations of Semen Gresik shares as a function of the exchange rate. If the U.S. dollar is indeed the rel- evant currency of denomination for the true valuation of Semen Gresik, much of the volatility in the share price as determined on the Jakarta exchange over the months prior to privatization reflects offsetting move- ments to the exchange rate itself. Note that the share prices illustrated here, ranging between Rp9,150 and Rp10,775, are considerably higher than the DCF valuation of Rp6,244 we derived previously.