Question list

Question $1$

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 $10$ million Honduran lempiras $($Lp$)$ next year $(2022),$ and that this free cash flow will continue to grow at a constant rate of $8\mathrm{.}0\%$ 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 $Lp23\mathrm{.}81=$$$1\mathrm{.}00,$ but the Honduran inflation rate is expected to remain at a relatively high rate of $14\mathrm{.}0\%$ per annum compared to the U$.$S$.$ dollar inflation rate of only $3\mathrm{.}5\%$ per annum. Slinger Wayne expects to earn at leasta $22\mathrm{.}5\%$ 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?

Question $2$

Question $3$

a$.$ What is Carambola worth if the Honduran lempira were to remain fixed over the three$-$year investment period?

Calculate the free cash flows in Honduran lempiras $($Lp$)$ below: $($Round to the nearest whole number.$)$

Question $4$

Question $5$

$q,$ Year $0q,$ Year $2$ Year $3$

Carambola's expected free cash flow $$ Lp $10,000,000$ Lp $$ Lp $$ Expected sale value in year $3q,$ Lp $$

Total expected cash flow

Lp

Lp $$ Lp $$

Expected exchange rate $($Lp$/$$$)$

$23\mathrm{.}8100$

Carambola's expected cash flow in US$