Executive Summary

Brasil Invetimentos' cash flows are being valued in US$ for all 3 countries
because the others are highly inflationary currencies and also as to provide a
way to compare each country fairly. J.P. Morgan has its reasons for not
estimating local discount rates. The WACC of Argentina 13.69%, the WACC of
Brazil is 15.77% and the WACC of Chile is 8.60%. We concluded that the long-
term perpetual growth rate for each of the business is around 4.09% for each
country. The worth is around .

Case
Brasil Invetimentos' cash flows are being valued in US$ for all 3 countries
because the others are highly inflationary currencies and also as to provide a
way to compare each country fairly.
Furthermore, J.P. Morgan has its reasons for not estimating local discount rates.
Firstly, J. P. Morgan is requested to value the business in U.S. dollars by the
client, a Brazilian industrial conglomerate.
Secondly, it is difficult to use the local markets parameters such local risk-free
rate, local-market premium, and beta in order to calculate the cost of equity,
which is one of the components of WACC.
Furthermore, it is questionable whether there is risk-free rates in countries like
Argentina, Brazil, and Chile, even sovereign bonds have risk of default because
the governments of these countries had defaulted on debt and interests
payments in the recent past.

Fourthly, any equity-risk premium derived from the available data in local equity
markets might not be a good estimate of the premium which investors requires,
because there is little historical data on equity markets for most Latin American
countries and most companies are family owned and not listed on stock
exchanges. Even though there are the listed companies, they are hardly traded
and have enough liquidity.
It is also difficult to come up with beta for Paginas Amarelas because there are
no relevant pure-play competitors in the telephone-directory industry, where all
the companies own other types of business.
It is better to use US parameters and adjust for country risks to estimate the
required rates of return for these countries. The reason that J. P. Morgan did not
discount the local cash flows at a local required rate of return is because many
valuation problems exist in using local parameters to estimate the required rate
of return. In fact, we do not generally use this approach because we need to
estimate the adjusted factors that would correctly reflect the higher risks offered
by equity investment in the local areas which will bring additional questions to us.
In order to calculate Beta, there are no relevant pure-play competitors in the
telephone-directory industry, and all the companies operating in this industry
owned other types of business. In addition to that, those that did not were too
small to provide a realistic comparison.
The following is the presentation of calculating the WACC for the operations in
Argentina, Brazil and Chile.
Newsp
apers
Publishing
/Printing
Radio
Station
s
Aver
age
Note
Industry Beta in
U.S.
0.8218 0.8539 0.8751 0.85
02
=unlevered x
{1+(1+(1-t)} x
debt/capital

Unlevered Beta 0.74 0.76 0.77 0.75
67
S&P 500 Index
Income Tax Rate 35% 35% 35% 0.35
Market Value
Debt/Capital Ratio
17% 19% 21% 19%

Argenti
na
Brazil Chile U.S. Note
Rf 5.92% 5.92% 5.92% 5.92
%
1 year T-Bill
Industry Beta in
U.S
0.8502 0.8502 0.8502 0.85
02
Average Industry beta
in U.S.
Country Beta
(Against S&P
500)
1.96 2.42 0.65 1
Correlation
(Against S&P
500)
0.32 0.4 0.23 1
Std 0.6163 0.6086 0.2854 0.10
08

0.1006 0.1006 0.101 0.10
08
_M= (_(i,M)_A)/
Market Risk
Premium
5.50% 5.50% 5.50% 5.50
%
S&P 500 Index
Cost of Capital 15.09
%
17.24% 8.96% 10.6
0%
R_i= R_f+ _Ind
_Cou (R_m-R_f)
Local Borrowing
Rate (1 Year)
9.80% 12.40% 7.90% 7.25
%

Income Tax 35.00
%
35.00% 15.00
%
35.0
0%

Cost of Debt 6.37% 8.06% 6.72% 4.71
%
Cost of debt = r(1-t)
Cost of Capital 15.09
%
17.24% 8.96% 10.6
0%

Portion of Capital 84.03
%
84.03% 84.03
%
84.0
3%
Average debt/Capital
Ratio= 19%
Cost of Debt 6.37% 8.06% 6.72% 4.71
%

Portion of Debt 15.97
%
15.97% 15.97
%
15.9
7%
Average debt/Capital
Ratio= 19%
WACC 13.69
%
15.77% 8.60% 9.66
%



The WACC of Argentina 13.69%, the WACC of Brazil is 15.77% and the WACC
of Chile is 8.60%.

On the other hand, we are going to take the average of the historical growth rate
of each country's cash flow to estimate the reasonable long-term perpetual
growth rate for each of those businesses.


Argentina- Free Cash
Flow (in 000's USD)

1997 19
98
1999 2000 20
01
2002 20
03
20
04

6930 71
17
7331 7617 79
90
8462 88
16
91
69
Av
era
ge
Growth Rate 2.
70
%
3.01% 3.90
%
4.
90
%
5.91% 4.1
8%
4.0
0%
4.0
9%

Brazil - Free
Cash Flow (in
000's USD)

1997 19
98
1999 2000 20
01
2002 20
03
20
04

10920 11
21
5
11551 1200
2
12
59
1
13334 13
89
3
14
44
8
Av
era
ge
Growth Rate 2.
70
%
3.00% 3.90
%
4.
91
%
5.90% 4.1
9%
3.9
9%
4.0
9%

Chile - Free
Cash Flow (in
000's USD)

1997 19
98
1999 2000 20
01
2002 20
03
20
04

3150 32
35
3332 3462 36
32
3846 40
07
41
68
Av
era
ge
Growth Rate 2.
70
%
3.00% 3.90
%
4.
91
%
5.89% 4.1
9%
4.0
2%
4.0
9%

From the above, we conclude that the long-term perpetual growth rate for each of
the business is around 4.09% for each country.

The worth of Brasil Investimentions business can be estimated using the
discounted cash flow method.