1. Carambola de Honduras. Slinger Wayne, a U.S.-based private equity firm, is trying to determine what it should pay for a tool manufacturing firm in Honduras named Carambola. Slinger Wayne estimates that Carambola will generate a free cash flow of 14 million Honduran lempiras (Lp) next year, and that this free cash flow will continue to grow at a constant rate of 8.5% per annum indefinitely. A private equity firm like Slinger Wayne, however, is not interested in owning a company for long, and plans to sell Carambola at the end of three years for approximately 10 times Carambola's free cash flow in that year. The current spot exchange rate is Lp15.5077/$, but the Honduran inflation rate is expected to remain at a relatively high rate of 18.0% per annum compared to the U.S. dollar inflation rate of only 3.5% per annum. Slinger Wayne expects to earn at least a 20% annual rate of return on international investments like Carambola. a. What is Carambola worth if the Honduran lempira were to remain fixed over the three-year investment period? b. What is Carambola worth if the Honduran Lempira were to change in value over time according to purchasing power parity? a. Calculate the free cash flows in Honduran lempiras (Lp) below: (Round to the nearest whole number.) Year o Year 1 Year 2 Year 3 Carambola's expected free cash flow Lp 14,000,000 LPC LP Expected sale value in year 3 Lp Total expected cash flow Lp Lp Lp Expected exchange rate (Lp/$) 15.5077 Carambola's expected cash flow in US$ Assume that the Honduran lempira were to remain fixed over the three-year investment period. Calculate the free cash flows in U.S. dollars below: (Round to the nearest dollar.) Year 1 Year 2 Year 3 Carambola's expected free cash flow Expected sale value in year 3 Total expected cash flow Year 0 Expected exchange rate (Lp/$) 15.5077 15.5077 15.5077 15.5077 (Round to the Carambola's expected cash flow in US$ If Slinger Wayne expects to earn at least a 20% annual rate of return on international investments, the value of Carambola today is $ nearest dollar) b. Assume that the Honduran Lempira were to change in value over time according to purchasing power parity. Calculate the spot exchange rates for the next three years below: (Round to four decimal places.) b. Assume that the Honduran Lempira were to change in value over time according to purchasing power parity. Calculate the spot exchange rates for the next three years below: (Round to four decimal places.) Year 0 Year 1 Year 2 Year 3 Carambola's expected free cash flow LP 14,000,000 Expected sale value in year 3 Total expected cash flow Expected exchange rate (Lp/5) 15.5077 Carambola's expected cash flow in US$ Calculate the free cash flows in U.S. dollars below: (Round to the nearest dollar.) Year 1 Carambola's expected free cash flow Lp 14,000,000 Expected sale value in year 3 Total expected cash flow Year 0 Year 2 Year 3 Expected exchange rate (Lp/$) 15,5077 Carambola's expected cash flow in US$ If Slinger Wayne expects to earn at least a 20% annual rate of return on international investments, the value of Carambola today is $ nearest dollar) (Round to the
