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CORPORATE!FINANCE!
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Case!1:!Nextel!Peru:!Emerging!Market!Cost!of!Capital!
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Federal!Cohort!
Lorenzo!Rossi!
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https://www.coursehero.com/file/13702397/Corporate-Finance-Case-Nextel-Peru-Emerging-Market-Cost-of-Capital/
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 1)#
NII!focused!its!operations!in!Argentina,!Brazil,!Chile,!and!Mexico,!but!always!kept!its!
headquarter! in! Reston,! VA.! It! mainly! targeted! highLpaying! clients,! or! business!
customers!which!were!located!in!big!urban!areas.!
It! operated! in! a! highly! competitive! industry! and,! over! time,! its! technology! got!
outdated! such! that! NII! had! to! allocate! $1.5! billion! as! an! investment! to! upgrade! its!
technology! and! to! attract! more! and! more! customers.! Nonetheless,! such! spending!
didn’t!pay!back!as!both!total!revenues!and!service!revenues!decreased!substantially,!
such!that!from!2011!to!2012!net!income!went!from!positive!$225!million!to!negative!

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$765!million.!More!over,!NII!Holdings!stock!price!went!down!by!almost!65%!in!that!

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year.!Talking!about!Nextel!Peru,!it!was!part!of!NII!and!it!accounted!for!6%!of!its!total!

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revenues.! It! had! a! million! subscribers,! number! which! doubled! from! 2010! to! 2012,!
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reaching!2!million!at!the!end!of!the!year!thanks!to!promotions!and!discounts,!which!
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although!significantly!brought!down!the!ARPU.!Personally,!I!think!the!problem!here!
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has!been!a!lack!of!investments!in!research!and!development!and!a!lack!of!spending!in!
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technology!improvements!which!indeed!left!the!company!behind!its!competitors.!!
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They!made!a!huge!investment!($1.5B)!and!they!suffered!the!financial!distress!related!
to! it! and! to! the! deficiency! of! new! and! highLpaying! customers.! Entel! just! agreed! to!
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purchase!Nextel!for!a!price!in!between!$397!million!and!$415!million,!but!I!think!that!
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the!actual!offer!will!be!very!close!to!the!$397!million!due!to!the!severe!and!serious!
financial!conditions!of!the!company.!
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2)#
Nowadays,!markets!are!all!pretty!much!correlated,!some!more!and!some!less.!Over!
time,! globalization! made! all! markets! in! the! world! similar! to! a! whole! single! huge!
market.!However,!every!country!has!its!own!financial!and!economic!stability,!since!
markets! are! linked! together! but! every! one! has! its! own! conditions! and! every! one!
works! in! a! slightly! different! way,! following! its! own! different! strategy.! D’Anconia!

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https://www.coursehero.com/file/13702397/Corporate-Finance-Case-Nextel-Peru-Emerging-Market-Cost-of-Capital/
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 should!be!focused!on!the!way!that!global!markets!affect!the!Peruvian!one,!and!if!it!
does! to! what! extent,! in! order! then! to! be! able! to! calculate! an! accurate! country! risk!
premium.! To! calculate! the! relative! standard! deviation! of! Peru’s! stock! returns! and!
bond!yields!I!used!the!following!formula:!
)*+,-
!"#$%&'"()*+,- = ( !
)/0
so!that!I!find:!

•! Stock!Returns:!!

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!"#$%&'"()*+,- = ( = 1.93!
0.047

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•! 30years!Bond!Yields:!
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0.009
!"#$%&'"()*+,- = ( = 1.34!
0.007
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3)#
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I!think!that!if!D’Anconia!were!to!follow!a!process!in!order!to!calculate!the!required!
return!on!assets!it!should!use!the!last!model!proposed!in!the!case,!which!is!a!modified!
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version!of!the!CAPM!which!takes!into!account!the!country!risk!premium.!This!is!the!
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following:!
!"89&:";(!$%"(<=(!"%9:> = :? + A BC!D/0 + E(G<9>%:H(!&IJ(D:"K&9K)!
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With! this! version! of! the! CAPM,! we! can! truly! and! accurately! calculate! the! required!
return!on!assets.!We!indeed!separate!the!country!risk!premium!from!the!beta!A!and!
the! emerging! market! risk! premium! in! us! terms;! by! this,! we! can! account! for! the!
possibility! that! country! risk! might! be! different! from! other! types! of! risk,! and! could!
therefore!be!scaled!separately!by!its!own!factor,!λ.!
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https://www.coursehero.com/file/13702397/Corporate-Finance-Case-Nextel-Peru-Emerging-Market-Cost-of-Capital/
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 4)#
I!calculate!the!A!on!assets!for!Nextel!Peru!with!the!formula:!
R R
M<N$#B89&%H(A(O 1 − Q&I%( ( + (R"T%A(O(Q&I%( ()!
S S
once!I!have!this!for!all!the!companies!in!the!industry!I!average!out!to!get!an!estimate!
of!the!Beta!on!the!assets!for!Nextel!Peru!and!it!comes!out!to!be!A = 0.62!

Us!risk!free! 3.08%!
Peru!risk!free! 5.05%!
! ! !

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Us!MRP! 5%!

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! ! !

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Us!Cost!of!Cap! 6.56%!
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Peru!Cost!of!Cap! 8.60%!
(return!on!assets)!
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Both!risk!free!rates!for!Us!and!Peru!are!given!by!the!case.!Also!the!US!market!risk!
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premium!is!given!by!the!case.!To!calculate!Us!cost!of!capital!I!use!the!formula:!
:WXX+YXZ-X = :?Z-X + (A [\C!D + G<9>%:HC!D !
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and!I!get!6.56%.!Country!risk!premium!is!calculated!and!I!will!explain!the!steps!in!
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question!5.!
To!calculate!then!the!required!return!on!assets!for!Peru!I!use!the!following:!
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1 + :?Z]+,-
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:WXX+YXZ*+,- = 1 + :-X (O( − 1!

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https://www.coursehero.com/file/13702397/Corporate-Finance-Case-Nextel-Peru-Emerging-Market-Cost-of-Capital/
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 5)#
Growth!us! 3.00%!
Growth!peru! 5.90%!
! ! !
FCF0! ! 15,731!
FCF1! ! 16,659!
! ! !
Unlevered!Value! 616,992!
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StDev!Peru! 9.00%!
StDev!US! 4.66%!
Rel!StDev!Peru! 193.13%!
StDev!Debt!Peru! 27.35%!
Country!MRP! 0.65%!

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I!obtain!a!rough!growth!rate!from!the!case,!and!I!assume!that!since!the!company!is!

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mature,!it!will!grow!more!or!less!similarly!to!the!rate!at!which!the!Preuvian!economy!
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is!growing.!I!adopt!the!information!from!the!last!available!quarter!as!given!in!the!case,!
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which!is!a!growth!of!5.9%.!
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To! calculate! FCF! I! use! the! average! FCF! margin! with! respect! to! operating! revenues!
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given!in!the!Exhibit!and!I!multiply!it!with!the!operating!revenues!given!by!the!case!for!
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Nextel!Peru!in!2012.!To!calculate!FCF!at!time!1,!I!apply!the!growth!rate!of!5.9%!and!I!
get!a!FCF1=!$16,659.!I!know!that!I!can!use!the!following!formula:!
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S^ = !
(: − a)
and!I!get!a!value!of!the!enterprise!as!=!$616.992!million,!so!we!can!probably!say!that!
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the!company!is!being!undervalued.!
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In!the!end,!I!calculated!country!market!risk!premium!relative!to!Peru!as:!
\%R"'(<>(\%<NJI(&>(D":9
G<9>%:HC!D = D":9(!&IJ(=:"" − [\(!&IJ(=:"" (O(( )!
\%R"'(<>(30H:I(;"T%(&>(D":9
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https://www.coursehero.com/file/13702397/Corporate-Finance-Case-Nextel-Peru-Emerging-Market-Cost-of-Capital/
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