10. Santa Clara Electronics: Revenue Growth, Sales Price and Currency Risk Scenario. One of the new analysts...
Question:
10. Santa Clara Electronics: Revenue Growth, Sales Price and Currency Risk Scenario. One of the new analysts at Santa Clara, a recent MBA graduate, believes that it is a fundamental error to evaluate the Argentine project's prospective earnings and cash flows in dollars, rather than first estimating their Argentine peso (Ps) value and then converting cash flow returns to the U.S. in dollars. She believes the correct method is to use the end-of-year spot rate in 2003 of Ps3.50/$ and assume it will change in relation to purchasing power. (She is assuming U.S. inflation to be 1% per annum, Argentine inflation to be 5% per annum.) She also believes that Santa Clara should use a risk-adjusted discount rate in Argentina that reflects Argentine capital costs (20% is her estimate) and a risk-adjusted discount rate for the parent viewpoint capital budget (18%) on the assumption that international projects in a risky cur- rency environment should require a higher expected return than other lower risk projects. How do these assumptions and changes alter Santa Clara's per- spective on the proposed investment?
Step by Step Answer:
Fundamentals Of Multinational Finance
ISBN: 9780321541642
3rd Edition
Authors: Michael H. Moffett, Arthur I. Stonehill, David K. Eiteman