estimate required rates of return (WACC) for the cash flows originating in Brazil from a local perspective and from a US $ perspective.
All the information provided.
Brazil - Free Cash Flow (in 000's USD) 1997 $10.920 1998 $11.215 2003 $13,893 2004 $14,448 Terminal Value 144.483.644 w A 132689 10.0% 11.0% 12.0% 13.0% 14.0% 15.0% 16.0% 17.0% 18.0% 19.0% 20.0% 21.0% 22.0% 23.0% 24.0% 25.0% 1% $140,927 $126,176 $114,139 $104,135 $95,694 $88,478 $82,242 $76,801 $72,014 $67,771 $63,986 $60,589 $57,524 $54,746 $52,216 $49,904 1999 2000 2001 2002 $11,551 $12,002 $12,591 $13,334 Brazil - DCF Sensitivity Analysis (in 000's USD) Nominal Growth Rate in Perpetuity 3% 5% 6% 7% $164,464 $206,831 $243,903 $305,689 $143,574 $172,571 $195,768 $230,564 $127,343 $148,091 $163,652 $185,438 $114,371 $129,725 $140,692 $155,314 $103,769 $115,434 $123,454 $133,765 $94,944 $103,997 $110,032 $117,576 $87,485 $94,635 $99,283 $104,963 $81,100 $86,831 $90,478 $94,854 $75,572 $80,224 $83,131 $86,567 $70,740 $74,558 $76,907 $79,648 $66,483 $69,645 $71,565 $73,781 $62,703 $65,345 $66,930 $68,742 $59,324 $61,548 $62,869 $64,365 $56,288 $58,172 $59,281 $60,528 $53,543 $55,150 $56,087 $57,135 $51,051 $52,429 $53,226 $54,112 9% $799,975 $404,544 $272,581 $206,493 $166,759 $140,208 $121,193 $106,890 $95,730 $86,774 $79,421 $73,271 $68,049 $63,557 $59,649 $56,216 UVOLOS Exhibit PAGINAS AMARELAS Cash Flow Forecasts in Local Currencies and U.S. Dollars Argentina (pesos) Brazil reais) Chile (pesos) Free Cash Flows in Local Currency 1997 1998 1999 2000 2001 2002 2003 2004 6843 6,993 7.273 7,667 8.238 8.936 9516 10.159 11.460 12.122 12,850 13,740 14.833 16.167 17335 18,553 1.337.764 1,415,233 1.497,317 1.593.512 1.704.109 1.839.768 1.954.070 2,071.694 Inflation Forecast Argentina Brazil Chile United States *(Case writer's estimate) 1997 1.7% 6.9% 6.5% 3.0% 1998 2.5% 6.0% 6.1% 3.0% 1999 4.0% 6.0% 5.8% 3.0% 2000 4.5% 6.0% 5.5% 3.0% 2001 5.5% 6.0% 5.0% 3.0% 2002 5.5% 6.0% 5.0% 30% 2003 5.5% 6.0% 5.0% 30% 2004 5.5% 6.0% 50% 3.0% Spot Exchange Rates and Forward Exchange Rates (Local Currency: U.S. Dollar) 2000 2001 1.031 Argentine peso Brazilian real Chilean peso Jul-96 1.000 1.012 410.73 1997 0.987 1.050 424.60 1998 0.983 1.081 43747 1999 0.992 1.112 449.36 1.007 1.145 460.27 1.178 2002 1.056 1.212 478.32 1.082 1.248 487 50 2004 1.108 1.284 497 07 469.21 Free Cash Flows in U.S. Dollars Argentina Brazil Chile 1997 $6.930 $10.920 $3,150 1998 $7.117 $11.215 $3.235 1999 $7,331 $11,551 $3,332 2000 $7,617 $12.002 $3,462 2001 $7.990 $12.591 $3.632 2002 $8.462 $13.334 $3846 2003 $8.816 $13.893 $4.007 2004 $9,169 $14.448 $4,168 Note on the estimation of U.S. dollar cash flows: Cash flows were translated from local currency to U.S. dollars in the following manner: 1. Cash flows are projected in nominal local currency, taking inflation into account 2. A forecast of the exchange rate (the forward rate) between the dollar and local currency was based on interest rate parity, which assumes that the exchange rate reflects differences in the inflation rate between the two countries 3. Cash flows were then converted to U.S. dollars using the estimated exchange rate for each period. Case writer's note: A terminal value for each business unit was calculated using the perpetuity growth formula. Terminal value - Last year's cash flow x (1 + Growth rate in perpetuity) WACC - Growth rate in perpetuity * The two-way tables give the DCF values of free cash flow and terminal value, where the terminal value is estimated using the constant growth valuation model with the indicated growth rates in perpetuity. -15- UVOTOS Exhibits PAGINAS AMARELAS 1995 Operating Ratios of Paginas Amarelas % of Gross Revenues % of Net Revenues 1.6% 3.0% Revenues from ads and insertions Refunds provisions for bad debt Total revenues -% to local telephone co. Net revenues 45.0% 54.0% 83.3% 100% Costs Total printing costs Layout costs Distribution costs Costs from information services Variable costs Fixed costs 20.6% 1.9% 0.4% 2.0% 6.70% 5.08% 38.2% 3.5% 0.8% 3.7% 12.4% 9.4% Gross profit Depreciation SG&A 17.2% 0.16% 3.94% 31.9% 0.3% 7.3% Operating income Income taxes Net income 13.2% 4.6% 8.5% 24.4% 8.5% 15.8% - 16- UVOLOS Exhibit 6 PAGINAS AMARELAS Historical and Forecast Economic Data for Argentina, Brazil, and Chile Nominal GDP in USS billion) 1992 1993 1994 1995 1996 19971 Argentina $228.89 $257.85 $281.91 $275.43 $287.35 $305.87 Brazil $364.28 $423.53 $564.82 $717.42 $748.61 $772.43 Chile $42.75 $45.64 S52.18 $67.30 $75.27 $79.46 Source: J.P. Morgan Emerging Markets: Economic Indicators, 10 January 1997, 20. 19981 S331.98 S798.04 $85.79 Real GDP Growth 1992 1993 1994 1995 1996 Argentina 8.70% 6.00 7.40 -4.40 3.00 Brazil -0.90% 5.80 4.20 3.20 Chile 11.00% 6.30 4.20 8.50 6.70 Source: The Economist Intelligence Unit Country Report from the three countries 19971 4.20 3.40 4.80 19981 3.10 3.40 6.20 4.70 Consumer Prices -% Change from Previous Year Dec 93 Dec 94 Dec 95 Jul 96 Nov 96 Argentina 7.4% 3.9 1.6 0.0 0.4 Brazil 2489.1% 929.3 22.0 14.9 10.6 Chile 12.2% 8.2 7.7 Source: J.P. Morgan Emerging Markets: Economic Indicators, 10 January 1997, 7. 19971 1.7 6.9 6.5 19981 2.5 6.0 6.1 9.0 6.6 Total External Debt in USS billion 1992 1993 1994 1995 1996 19971 19981 Argentina $71.90 $76.65 $90.71 $97.21 $99.91 S103.56 S107.91 Brazil S133.61 $147.35 $157,06 S173.14 $187.10 S194.40 S208,23 Chile $18.96 $19.67 $21.77 $21.83 $21.48 $23.28 $25.98 Source: J.P. Morgan, Emerging Markets: Economic Indicators. 10 January 1997, 18. -17- UV0108 Exhibit 6 (continued) Net Foreign Direct Investment (in USS millions) 1989 1990 1991 1992 1993 Argentina $1,028 $1.836 S2.439 $2,562 S3.482 Brazil S608 $324 $89 S1.924 5801 Chile $1.279 5582 $400 S321 $375 Source: International Financial Statistics, 10 January 1997, 100, 150, 188 1994 S477 $2,035 5848 1995 SI. 164 $3,475 $1,008 International Reserves (excluding gold, S billions) 1994 1995 Jul 96 Sep 96e Argentina $14.3 $14.3 $14.4 $15.2 Brazil $38.8 S51.8 $59.5 $58.8 Chile $13.1 $14.1 $14.6 $14.6 Source: J.P. Morgan, Emerging Markets: Economic Indicators, January 10, 1997, 15. Nov 966 $14.9 S60.5 SI5.0 Foreign Currency Debt Ratings, July 1996 Argentina Brazil Moody's BI BI S&P BB B+ S&P Outlook Stable Positive Source: J.P. Morgan, Latin American Credit Ratings, January 1997, 1.2. Chile Baal A- Stable Equity Markets Country/index Dec-95 Aug-96 Sep-96 Oct-96 Ney-96e Argentina/Merval 100 96.8 104.4 103.1 107.5 Brazil/Ibovespa 100 145.6 150.0 152.0 Chile/IGPA 92.4 94.3 88,3 Source: J.P. Morgan, Emerging Markets: Economic Indicators, 10 January 1997, 4. Dec-99 100 195.1 Dec-96e 113.9 163.8 85.4 100 938 eestimate f forecast -25- UVO108 Exhibit 14 PAGINAS AMARELAS Capital Market Conditions, July 1996 U.S. Treasury Yields 1 year T-bill 2 year T-bond 5 vear T-bond 10 year T-bond 30 year T-bond Source: Bloomberg Yield to Maturity 5.92% 6.21% 6.57% 6.80% 7.00% Equity Market Risk Premiums Equity Market Risk Premium U.S. (S&P 500 5.5% Index) Global Equity Market Index 6.5% (MSCI) Estimated Local Borrowing Rates, Income Taxes, Capital Structure, & Country Betas 1.00 Argentina Brazil Chile U.S. Local risk-free rate (2 9.20% year) 11.99% 7.40% 6.57% Local borrowing rate (1 9.80% 12.40% 7.90% 7.25% Income tax rate 35.0% 35.0% 15.0% 35.0% Country beta (vs U.S. 1.96 2.42 0.65 S&P 500 Index) Ratio of target market value of debt to sum of debt plus equity for 20.0% 20.0% 20.0% NA telephone-directory business Volatility (sid dev of local 61.63% 60.86% 28.54% 10.08% equity market index) Correlation of local equity market index returns with 0.32 0.40 0.23 1.00 returns on S&P 500 Index in the U.S. Source: Case writer estimates: J.P. Morgan & Co., and International Finance Corporation, 1996 Emerging Stock Markets Factbook UVO108 Exhibit 14 (continued) Median Beta and Capital Structure Information for Certain U.S. Industries Publishing Printing Radio Stations Newspapers 0.68 0.67 0.73 Direct Information Marketing Services Unlevered beta, vs. 0.80 0.72 MSCI Index Unlevered beta, vs. S&P 0.86 0.79 500 Index Mean market value 18% debt/capital ratio Source: Case writer estimates and J.P. Morgan & Co. 0.74 0.76 0.77 17% 19% 21% Brazil - Free Cash Flow (in 000's USD) 1997 $10.920 1998 $11.215 2003 $13,893 2004 $14,448 Terminal Value 144.483.644 w A 132689 10.0% 11.0% 12.0% 13.0% 14.0% 15.0% 16.0% 17.0% 18.0% 19.0% 20.0% 21.0% 22.0% 23.0% 24.0% 25.0% 1% $140,927 $126,176 $114,139 $104,135 $95,694 $88,478 $82,242 $76,801 $72,014 $67,771 $63,986 $60,589 $57,524 $54,746 $52,216 $49,904 1999 2000 2001 2002 $11,551 $12,002 $12,591 $13,334 Brazil - DCF Sensitivity Analysis (in 000's USD) Nominal Growth Rate in Perpetuity 3% 5% 6% 7% $164,464 $206,831 $243,903 $305,689 $143,574 $172,571 $195,768 $230,564 $127,343 $148,091 $163,652 $185,438 $114,371 $129,725 $140,692 $155,314 $103,769 $115,434 $123,454 $133,765 $94,944 $103,997 $110,032 $117,576 $87,485 $94,635 $99,283 $104,963 $81,100 $86,831 $90,478 $94,854 $75,572 $80,224 $83,131 $86,567 $70,740 $74,558 $76,907 $79,648 $66,483 $69,645 $71,565 $73,781 $62,703 $65,345 $66,930 $68,742 $59,324 $61,548 $62,869 $64,365 $56,288 $58,172 $59,281 $60,528 $53,543 $55,150 $56,087 $57,135 $51,051 $52,429 $53,226 $54,112 9% $799,975 $404,544 $272,581 $206,493 $166,759 $140,208 $121,193 $106,890 $95,730 $86,774 $79,421 $73,271 $68,049 $63,557 $59,649 $56,216 UVOLOS Exhibit PAGINAS AMARELAS Cash Flow Forecasts in Local Currencies and U.S. Dollars Argentina (pesos) Brazil reais) Chile (pesos) Free Cash Flows in Local Currency 1997 1998 1999 2000 2001 2002 2003 2004 6843 6,993 7.273 7,667 8.238 8.936 9516 10.159 11.460 12.122 12,850 13,740 14.833 16.167 17335 18,553 1.337.764 1,415,233 1.497,317 1.593.512 1.704.109 1.839.768 1.954.070 2,071.694 Inflation Forecast Argentina Brazil Chile United States *(Case writer's estimate) 1997 1.7% 6.9% 6.5% 3.0% 1998 2.5% 6.0% 6.1% 3.0% 1999 4.0% 6.0% 5.8% 3.0% 2000 4.5% 6.0% 5.5% 3.0% 2001 5.5% 6.0% 5.0% 3.0% 2002 5.5% 6.0% 5.0% 30% 2003 5.5% 6.0% 5.0% 30% 2004 5.5% 6.0% 50% 3.0% Spot Exchange Rates and Forward Exchange Rates (Local Currency: U.S. Dollar) 2000 2001 1.031 Argentine peso Brazilian real Chilean peso Jul-96 1.000 1.012 410.73 1997 0.987 1.050 424.60 1998 0.983 1.081 43747 1999 0.992 1.112 449.36 1.007 1.145 460.27 1.178 2002 1.056 1.212 478.32 1.082 1.248 487 50 2004 1.108 1.284 497 07 469.21 Free Cash Flows in U.S. Dollars Argentina Brazil Chile 1997 $6.930 $10.920 $3,150 1998 $7.117 $11.215 $3.235 1999 $7,331 $11,551 $3,332 2000 $7,617 $12.002 $3,462 2001 $7.990 $12.591 $3.632 2002 $8.462 $13.334 $3846 2003 $8.816 $13.893 $4.007 2004 $9,169 $14.448 $4,168 Note on the estimation of U.S. dollar cash flows: Cash flows were translated from local currency to U.S. dollars in the following manner: 1. Cash flows are projected in nominal local currency, taking inflation into account 2. A forecast of the exchange rate (the forward rate) between the dollar and local currency was based on interest rate parity, which assumes that the exchange rate reflects differences in the inflation rate between the two countries 3. Cash flows were then converted to U.S. dollars using the estimated exchange rate for each period. Case writer's note: A terminal value for each business unit was calculated using the perpetuity growth formula. Terminal value - Last year's cash flow x (1 + Growth rate in perpetuity) WACC - Growth rate in perpetuity * The two-way tables give the DCF values of free cash flow and terminal value, where the terminal value is estimated using the constant growth valuation model with the indicated growth rates in perpetuity. -15- UVOTOS Exhibits PAGINAS AMARELAS 1995 Operating Ratios of Paginas Amarelas % of Gross Revenues % of Net Revenues 1.6% 3.0% Revenues from ads and insertions Refunds provisions for bad debt Total revenues -% to local telephone co. Net revenues 45.0% 54.0% 83.3% 100% Costs Total printing costs Layout costs Distribution costs Costs from information services Variable costs Fixed costs 20.6% 1.9% 0.4% 2.0% 6.70% 5.08% 38.2% 3.5% 0.8% 3.7% 12.4% 9.4% Gross profit Depreciation SG&A 17.2% 0.16% 3.94% 31.9% 0.3% 7.3% Operating income Income taxes Net income 13.2% 4.6% 8.5% 24.4% 8.5% 15.8% - 16- UVOLOS Exhibit 6 PAGINAS AMARELAS Historical and Forecast Economic Data for Argentina, Brazil, and Chile Nominal GDP in USS billion) 1992 1993 1994 1995 1996 19971 Argentina $228.89 $257.85 $281.91 $275.43 $287.35 $305.87 Brazil $364.28 $423.53 $564.82 $717.42 $748.61 $772.43 Chile $42.75 $45.64 S52.18 $67.30 $75.27 $79.46 Source: J.P. Morgan Emerging Markets: Economic Indicators, 10 January 1997, 20. 19981 S331.98 S798.04 $85.79 Real GDP Growth 1992 1993 1994 1995 1996 Argentina 8.70% 6.00 7.40 -4.40 3.00 Brazil -0.90% 5.80 4.20 3.20 Chile 11.00% 6.30 4.20 8.50 6.70 Source: The Economist Intelligence Unit Country Report from the three countries 19971 4.20 3.40 4.80 19981 3.10 3.40 6.20 4.70 Consumer Prices -% Change from Previous Year Dec 93 Dec 94 Dec 95 Jul 96 Nov 96 Argentina 7.4% 3.9 1.6 0.0 0.4 Brazil 2489.1% 929.3 22.0 14.9 10.6 Chile 12.2% 8.2 7.7 Source: J.P. Morgan Emerging Markets: Economic Indicators, 10 January 1997, 7. 19971 1.7 6.9 6.5 19981 2.5 6.0 6.1 9.0 6.6 Total External Debt in USS billion 1992 1993 1994 1995 1996 19971 19981 Argentina $71.90 $76.65 $90.71 $97.21 $99.91 S103.56 S107.91 Brazil S133.61 $147.35 $157,06 S173.14 $187.10 S194.40 S208,23 Chile $18.96 $19.67 $21.77 $21.83 $21.48 $23.28 $25.98 Source: J.P. Morgan, Emerging Markets: Economic Indicators. 10 January 1997, 18. -17- UV0108 Exhibit 6 (continued) Net Foreign Direct Investment (in USS millions) 1989 1990 1991 1992 1993 Argentina $1,028 $1.836 S2.439 $2,562 S3.482 Brazil S608 $324 $89 S1.924 5801 Chile $1.279 5582 $400 S321 $375 Source: International Financial Statistics, 10 January 1997, 100, 150, 188 1994 S477 $2,035 5848 1995 SI. 164 $3,475 $1,008 International Reserves (excluding gold, S billions) 1994 1995 Jul 96 Sep 96e Argentina $14.3 $14.3 $14.4 $15.2 Brazil $38.8 S51.8 $59.5 $58.8 Chile $13.1 $14.1 $14.6 $14.6 Source: J.P. Morgan, Emerging Markets: Economic Indicators, January 10, 1997, 15. Nov 966 $14.9 S60.5 SI5.0 Foreign Currency Debt Ratings, July 1996 Argentina Brazil Moody's BI BI S&P BB B+ S&P Outlook Stable Positive Source: J.P. Morgan, Latin American Credit Ratings, January 1997, 1.2. Chile Baal A- Stable Equity Markets Country/index Dec-95 Aug-96 Sep-96 Oct-96 Ney-96e Argentina/Merval 100 96.8 104.4 103.1 107.5 Brazil/Ibovespa 100 145.6 150.0 152.0 Chile/IGPA 92.4 94.3 88,3 Source: J.P. Morgan, Emerging Markets: Economic Indicators, 10 January 1997, 4. Dec-99 100 195.1 Dec-96e 113.9 163.8 85.4 100 938 eestimate f forecast -25- UVO108 Exhibit 14 PAGINAS AMARELAS Capital Market Conditions, July 1996 U.S. Treasury Yields 1 year T-bill 2 year T-bond 5 vear T-bond 10 year T-bond 30 year T-bond Source: Bloomberg Yield to Maturity 5.92% 6.21% 6.57% 6.80% 7.00% Equity Market Risk Premiums Equity Market Risk Premium U.S. (S&P 500 5.5% Index) Global Equity Market Index 6.5% (MSCI) Estimated Local Borrowing Rates, Income Taxes, Capital Structure, & Country Betas 1.00 Argentina Brazil Chile U.S. Local risk-free rate (2 9.20% year) 11.99% 7.40% 6.57% Local borrowing rate (1 9.80% 12.40% 7.90% 7.25% Income tax rate 35.0% 35.0% 15.0% 35.0% Country beta (vs U.S. 1.96 2.42 0.65 S&P 500 Index) Ratio of target market value of debt to sum of debt plus equity for 20.0% 20.0% 20.0% NA telephone-directory business Volatility (sid dev of local 61.63% 60.86% 28.54% 10.08% equity market index) Correlation of local equity market index returns with 0.32 0.40 0.23 1.00 returns on S&P 500 Index in the U.S. Source: Case writer estimates: J.P. Morgan & Co., and International Finance Corporation, 1996 Emerging Stock Markets Factbook UVO108 Exhibit 14 (continued) Median Beta and Capital Structure Information for Certain U.S. Industries Publishing Printing Radio Stations Newspapers 0.68 0.67 0.73 Direct Information Marketing Services Unlevered beta, vs. 0.80 0.72 MSCI Index Unlevered beta, vs. S&P 0.86 0.79 500 Index Mean market value 18% debt/capital ratio Source: Case writer estimates and J.P. Morgan & Co. 0.74 0.76 0.77 17% 19% 21%
