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Posted on Jul 25, 2024

1. Refer to Exhibit 1 in Nextel Peru case-study. Assume you are an analyst for XYZ firm, an asset holding firm with diversified assets across

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1. Refer to Exhibit 1 in Nextel Peru case-study. Assume you are an analyst for XYZ firm, an asset holding firm with diversified assets across South America. You are trying to figure out the cost of capital, and as the first step, you are trying to estimate equity betas for comparable firms. a) Which equity beta should you use? S&P equity beta, MSCI World equity beta, MSCI Latin equity beta, or local equity beta? Why? b) To calculate the cost of capital, is it appropriate to use the equity betas directly? c) Calculate the average asset beta for a firm in wireless industry in Latin America. 2. Why do we use the U.S. T-bill rate as a proxy for risk-free rate in the international CAPM equation? Does it make sense to use U.S. risk free rate data in an international setting? 3. Assume the market risk premium for S&P 500 is 5.1%, Global index is 5.3%, Latin American index is 4.8%, and local index is 8.4%. Calculate the required rate of return for this acquisition 4. Calculate the implied local required rate of return. (Local Currency in Millions) Historic DN (2) 17.73% 25.18% 13.74% Companies: America Movil Embratel Participacoes S.A. Empresa Nacional De Telecomunicaciones NII Holdings Oi SA Telecom Argentina Telefonica Brasil Telefonica Del Peru TIM Participacoes S.A. Equity Value (1) 963.882 13,173 2,356,959 943 10.152 24.167 59,983 7,833 21.196 Net Minority Enterprise Debt Interest Value 363.978 8,990 1,336,850 2.238 4,842 20.252 385,754 0 2,742,713 3.774 0 4,716 28.921 0 39,073 (3,969) 200 20.398 975 0 0 60,957 2.213 0 10.045 1.632 0 22.828 Current DN 27.23% 11.05% 14.06% 80.01% 74.02% -19.46% 1.60% 22.03% 7.15% S&P Equity Beta (3) 1.12 0.53 0.83 0.65 1.08 1.31 0.73 0:38 0.82 MSCI MSCI World Latin Local Equity Equity Equity Beta (4) Beta (5) Beta (6) 1.01 0.75 0.91 0.63 0.64 0.56 0.80 0.81 0.77 0.77 0.67 0.65 1.14 1.08 0.86 1.17 0.89 1.05 1.58 0.63 0.47 0.35 0.24 0.49 0.81 0.74 0.58 41.68% 32.48% -13.91% 3.28% 26.57% 6.78% Debt Beta (7) 0.12 0.05 0.07 0.18 0.15 0.00 0.00 0.17 0.07 Source: All information except equity betas S&P Capital Q accessed 3/14/14. (1) Stock prices as of 4/1/13, except NII Holdings, which was 4/5/13. (2) Quarterly average over the past three years. (3) Source: Bloomberg accessed 3/14/14. Raw three year monthly betas. (4) Source: Bloomberg accessed 3/14/14. Raw three year monthly betas based on US dollar denominated returns. (5) Source: Bloomberg accessed 3/14/14. Raw three year monthly betas based on US dollar denominated retums. (6) Source: Bloomberg accessed 3/14/14. Raw three year monthly betas based on local currencies. (7) Case writer estimates (Local Currency in Millions) Companies: America Movil Embratel Participacoes S.A. Empresa Nacional De Telecomunicaciones NII Holdings Oi SA Telecom Argentina Telefonica Brasil Telefonica Del Peru TIM Participacoes S.A. Revenue Growth 13.0% 45.0% 14.8% -11.7% 165.1% 18.3% 2.1% 5.3% 6.8% Last 12 Months: EBIT EBITDA EBLAT Margin Margin Margin (1) 19.7% 33.0% 21.8% 11.5% 26.9% 5.9% 17.4% 38.4% 14.5% 0.9% 14.2% NM 18.6% 30.1% 12.3% 18.3% 26.3% 11.9% 20.2% 35.9% 12.8% 19.3% 34.7% 11.3% 13.8% 28.0% 9.5% FCF Revenue Margin Growth (2) 10.6% 19.1% -11.0% 17.2% 3.0% 8.1% -6.7% 10.4% 2.4% 20.5% 8.5% 19.4% 19.2% 18.1% 12.8% 6.3% 2.3% 8.6% 5 Year Average: EBIT EBITDA EBIAT Margin Margin Margin (1) 12.0% 14.4% 10.3% 12.1% 13.1% 8.6% 21.6% 42.7% 18.2% 14.0% 24.2% 9.1% 22.2% 33.9% 15.9% 20.8% 30.5% 13.5% 21.4% 36.9% 15.0% 19.2% 39.7% 10.9% 8.6% 26.6% 5.2% FCF Margin 11.1% 1.3% 5.6% 3.0% 16.0% 12.1% 16.9% 15.7% 4.2% Average Median 28.7% 13.0% 15.5% 18.3% 29.7% 30.1% 12.5% 12.1% 4.6% 3.0% 14.2% 17.2% 16.9% 19.2% 29.1% 30.5% 11.9% 10.9% 9.5% 11.1% (1) EBIAT - EBIT(1-t) using the effective tax rate. (3) 5 year revenue growth is on a compund annual basis. Source: Data from S&P Capital Q accessed on 2/27/13. 1. Refer to Exhibit 1 in Nextel Peru case-study. Assume you are an analyst for XYZ firm, an asset holding firm with diversified assets across South America. You are trying to figure out the cost of capital, and as the first step, you are trying to estimate equity betas for comparable firms. a) Which equity beta should you use? S&P equity beta, MSCI World equity beta, MSCI Latin equity beta, or local equity beta? Why? b) To calculate the cost of capital, is it appropriate to use the equity betas directly? c) Calculate the average asset beta for a firm in wireless industry in Latin America. 2. Why do we use the U.S. T-bill rate as a proxy for risk-free rate in the international CAPM equation? Does it make sense to use U.S. risk free rate data in an international setting? 3. Assume the market risk premium for S&P 500 is 5.1%, Global index is 5.3%, Latin American index is 4.8%, and local index is 8.4%. Calculate the required rate of return for this acquisition 4. Calculate the implied local required rate of return. (Local Currency in Millions) Historic DN (2) 17.73% 25.18% 13.74% Companies: America Movil Embratel Participacoes S.A. Empresa Nacional De Telecomunicaciones NII Holdings Oi SA Telecom Argentina Telefonica Brasil Telefonica Del Peru TIM Participacoes S.A. Equity Value (1) 963.882 13,173 2,356,959 943 10.152 24.167 59,983 7,833 21.196 Net Minority Enterprise Debt Interest Value 363.978 8,990 1,336,850 2.238 4,842 20.252 385,754 0 2,742,713 3.774 0 4,716 28.921 0 39,073 (3,969) 200 20.398 975 0 0 60,957 2.213 0 10.045 1.632 0 22.828 Current DN 27.23% 11.05% 14.06% 80.01% 74.02% -19.46% 1.60% 22.03% 7.15% S&P Equity Beta (3) 1.12 0.53 0.83 0.65 1.08 1.31 0.73 0:38 0.82 MSCI MSCI World Latin Local Equity Equity Equity Beta (4) Beta (5) Beta (6) 1.01 0.75 0.91 0.63 0.64 0.56 0.80 0.81 0.77 0.77 0.67 0.65 1.14 1.08 0.86 1.17 0.89 1.05 1.58 0.63 0.47 0.35 0.24 0.49 0.81 0.74 0.58 41.68% 32.48% -13.91% 3.28% 26.57% 6.78% Debt Beta (7) 0.12 0.05 0.07 0.18 0.15 0.00 0.00 0.17 0.07 Source: All information except equity betas S&P Capital Q accessed 3/14/14. (1) Stock prices as of 4/1/13, except NII Holdings, which was 4/5/13. (2) Quarterly average over the past three years. (3) Source: Bloomberg accessed 3/14/14. Raw three year monthly betas. (4) Source: Bloomberg accessed 3/14/14. Raw three year monthly betas based on US dollar denominated returns. (5) Source: Bloomberg accessed 3/14/14. Raw three year monthly betas based on US dollar denominated retums. (6) Source: Bloomberg accessed 3/14/14. Raw three year monthly betas based on local currencies. (7) Case writer estimates (Local Currency in Millions) Companies: America Movil Embratel Participacoes S.A. Empresa Nacional De Telecomunicaciones NII Holdings Oi SA Telecom Argentina Telefonica Brasil Telefonica Del Peru TIM Participacoes S.A. Revenue Growth 13.0% 45.0% 14.8% -11.7% 165.1% 18.3% 2.1% 5.3% 6.8% Last 12 Months: EBIT EBITDA EBLAT Margin Margin Margin (1) 19.7% 33.0% 21.8% 11.5% 26.9% 5.9% 17.4% 38.4% 14.5% 0.9% 14.2% NM 18.6% 30.1% 12.3% 18.3% 26.3% 11.9% 20.2% 35.9% 12.8% 19.3% 34.7% 11.3% 13.8% 28.0% 9.5% FCF Revenue Margin Growth (2) 10.6% 19.1% -11.0% 17.2% 3.0% 8.1% -6.7% 10.4% 2.4% 20.5% 8.5% 19.4% 19.2% 18.1% 12.8% 6.3% 2.3% 8.6% 5 Year Average: EBIT EBITDA EBIAT Margin Margin Margin (1) 12.0% 14.4% 10.3% 12.1% 13.1% 8.6% 21.6% 42.7% 18.2% 14.0% 24.2% 9.1% 22.2% 33.9% 15.9% 20.8% 30.5% 13.5% 21.4% 36.9% 15.0% 19.2% 39.7% 10.9% 8.6% 26.6% 5.2% FCF Margin 11.1% 1.3% 5.6% 3.0% 16.0% 12.1% 16.9% 15.7% 4.2% Average Median 28.7% 13.0% 15.5% 18.3% 29.7% 30.1% 12.5% 12.1% 4.6% 3.0% 14.2% 17.2% 16.9% 19.2% 29.1% 30.5% 11.9% 10.9% 9.5% 11.1% (1) EBIAT - EBIT(1-t) using the effective tax rate. (3) 5 year revenue growth is on a compund annual basis. Source: Data from S&P Capital Q accessed on 2/27/13