Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

image text in transcribed

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 13 million Honduran lempiras (Lp) next year, and that this free cash flow will continue to grow at a constant rate of 8.0% 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 Lp14.7281/$, but the Honduran inflation rate is expected to remain at a relatively high rate of 18.0% per annum compared to the U.S. dollar inflation rate of only 4.5% per annum. Slinger Wayne expects to earn at least a 22.5% annual rate of return on international investments like Carambola. a. What is Carambola worth if the Honduran lempira were to remain fixed over the three-year investment period? b. What is Carambola worth if the Honduran lempira were to change in value over time according to purchasing power parity? a. Calculate the free cash flows in Honduran lempiras (Lp) below: (Round to the nearest whole number.) Year 0 Year 2 Year 3 Year 1 Lp 13,000,000 Lp Lp Carambola's expected free cash flow Expected sale value in year 3 Total expected cash flow Lp Lp Lp Lp Expected exchange rate (Lp/5) 14.7281 Carambola's expected cash flow in US$

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Markets And Institutions

Authors: Frederic S. Mishkin, Stanley G. Eakin

7th Global Edition

0273754440, 9780273754442

More Books

Students also viewed these Finance questions

Question

=+What kind of study is this?

Answered: 1 week ago