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 12 million Honduran lempiras (Lp) next year, and that this free cash flow will continue to grow at a constant rate of 7.5% 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 Lp14.5049/$, but the Honduran inflation rate is expected to remain at a relatively high rate of 15.5% per annum compared to the U.S. dollar inflation rate of only 5.5% per annum. Slinger Wayne expects to earn at least a 23.5% annual rate of return on international investments like Carambola. a. What is Carambola worth if the Honduran lempira were to remain fixed over the three-year investment period? b. What is Carambola worth if the Honduran lempira were to change in value over time according to purchasing power parity? a. Calculate the free cash flows in Honduran lempiras (Lp) below: (Round to the nearest whole number.) Year 0 Year 1 Year 2 Year 3 Carambola's expected free cash flow Lp 12,000,000 Lp Lp
Carambola de Honduras. Slinger Wayne, a U.S.-based private equity firm, is trying to determine what it should pay for a tool manufacturing firm in Honduras named Carambola. Slinger Wayne estimates that Carambola will generate a free cash flow of 12 million Honduran lempiras (Lp) next year, and that this free cash flow will continue to grow at a constant rate of 7.5% per annum indefinitely. A private equity firm like Slinger Wayne, however, is not interested in owning a company for long, and plans to sell Carambola at the end of three years for approximately 10 times Carambola's free cash flow in that year. The current spot exchange rate is Lp14.5049/$, but the Honduran inflation rate is expected to remain at a relatively high rate of 15.5% per annum compared to the U.S. dollar inflation rate of only 5.5% per annum. Slinger Wayne expects to earn at least a 23.5% 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 1 Year 2 Year 3 Carambola's expected free cash flow Lp 12,000,000 Lp Lp
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text: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 12 million Honduran lempiras (Lp) next year, and that this free cash flow will continue
to grow at a constant rate of 7.5% 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 Lp14.5049/$, but the Honduran inflation rate is expected to remain at a relatively high rate
of 15.5% per annum compared to the U.S. dollar inflation rate of only 5.5% per annum. Slinger Wayne expects to earn at least a 23.5% annual rate of return on international
investments like Carambola.
a. What is Carambola worth if the Honduran lempira were to remain fixed over the three-year investment period?
b. What is Carambola worth if the Honduran lempira were to change in value over time according to purchasing power parity?
a. Calculate the free cash flows in Honduran lempiras (Lp) below: (Round to the nearest whole number.)
Year 0
Year 1
Year 2
Year 3
Carambola's expected free cash flow
Lp
12,000,000 Lp
Lp
Expected sale value in year 3
Lp
Total expected cash flow
Lp
Lp
Lp
Expected exchange rate (Lp/$)
14.5049
Carambola's expected cash flow in US$
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