Paginas Amarelas Case Study

7571 words - 30 pages

Table of Contents1 Introduction 22 Determining the Medium and Long Term Growth Rates 42.1 Growth in the Telephone Directory Industry 52.1.1 Competition 62.1.2 Demand for Telephone Lines 92.1.3 A Short Summary of the Growth Prospects in the Region 102.2 Estimation of the Growth Rates for Argentina 112.3 Estimation of the Growth Rates for Brazil 122.4 Estimation of the Growth Rates for Chile 133 Calculating the Cost of Capital 133.1 The Godfrey and Espinosa (1996) Model 143.1.1 Determining the Risk Free Rate 153.1.2 Determining βadj 153.1.3 Determining the Market Risk Premium 173.1.4 Determining the Credit Spread 173.1.5 Calculating the Cost of Capital 183.1.6 Criticisms of the Godfrey and Espinosa (1996) Model 194 Determining the Cost of Debt 205 Calculating WACC 206 Calculating the Present Value of Paginas Amarelas 216.1 Valuing the Argentinean Operations 216.2 Valuing the Brazilian Operations 226.3 Valuing the Chilean Operations 226.4 The Present Value of the Operations of Paginas Amarelas 237 Conclusion 258 Appendix A 279 Appendix B 2810 References: 291 IntroductionThe aim of this case study is to determine the value of Paginas Amarlas, and advise Brasil Investimentos what the appropriate action would be, given the information available to them in 1996. Expected future events and forecasting techniques, together with the company performance results are used to perform appropriate valuations. The options available to Brasil Investimentos would be the sale or restructuring of Paginas Amarelas.In order to value Paginas Amarelas, future cash flows would need to be projected, a long run perpetual growth rate would need to be determined and the weighted average cost of capital (WACC) would need to be calculated using the cost of debt and the cost of equity. The future cash flows have been projected by Juan Lopez , but the perpetual growth rate of free cash flows after 2004 needs to be determined. An analysis of the industry shows that the growth in the industry will not be constant after 2004, and thus a medium term growth and a long term perpetual growth rate is used. The medium term for Paginas Amarelas is defined as the time period when demand for telephone lines is growing rapidly, and the long term as the period when the demand for new telephone lines is fairly stagnant. An analysis of the industry shows that the medium term will present robust growth rates, and to calculate only a long term constant perpetual growth rate would undervalue the company as this unsustainably high growth would have to be overlooked to allow a lower, more sustainable, long term growth rate.The free cash flows will be discounted to their present value using WACC, the cost of debt used will be the local borrowing rate, and the cost of equity will be calculated using the Godfrey and Espinosa (1996) method. Although this method does contain flaws, which will be discussed, it is very practical, and is the only valuation model suitable given the data's availability...

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