Recall this is a report that an analyst is writing for his

Recall this is a report that an analyst is writing for his employer an international investor. The aim is to check if the price a company in its portfolio has paid to acquire NEXTEL in 2013 is reasonable. Price or Value can be determined as a PV of expected Free Cashflows (FCF). So the task requires you to estimate both inputs though the main focus is the cost-of-capital.Cost of capital – Obviously the required rate of return that investors seek to provide Nextel with capital cannot directly be observed as it is a subsidiary of NII.This necessitates a different way of tacking this problem — see lecture 1 material for guidance. The complication is whether the should be some adjustment through the inclusion of a country premium as this investment is in an emerging market (see discussion in the relevant section of the case). As I mentioned in class the inclusion of a premium for potential risk depends on whether you believe Peru is integrated or segmented from world markets. For instance if you believe a country is integrated with the rest of the world then risk (beta) is estimated relative to a world/international market index rather than a local/country market index. Your assumption is also relevant for the risk-free rate (i.e should you use an international Rf or a local proxy) and the market risk-premium. As always being consistent goes a long way when determining the cost-of-capital.Free Cashflows – The standard definition of FCF from Lecture 6 is FCF to Equity = FCF to the firm – Interest Expense – Principal Repayments + Proceeds of new debt issues. To do this properly one would need to estimate CAPEX Change in Net Working Capital interest expense etc. The problem is the case in Exhibit 3 doesn’t give you much to work with. If you are trying to estimate FCFs properly you are will need to make assumptions of the above missing information and if you are going down this path don’t forget to mention these in your report. The second approach would be to do a rough back-of-the-envelope calculation using other data provided in the case.

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