J.P. Morgan’s Latin America M&A department Essay

Juan Lopez, a new dude in J.P. Morgans Latin the States M&A department, was assigned the job of valuing the telephone directory operation subsidiary company of a large brazilian industrial conglomerate. The subsidiary is Paginas Am atomic number 18las, which operates in three Latin countries such as Argentina, Brazil, and Chile. All cash flows commit been converted to U.S. dollars, and move over values computed for assorted deductive reasoning rates. In order to the present value right on, he should determine the captivate target rate of drive offs for dollar flows originating in Argentina, Brazil, and Chile.Q1.What is the evaluation problem here? In what property are the cash flows denominated? In what currency should the tax write-off rate denominated? Be sure you understand Exhibits 1, 2, 3, and 4 of the case. Juan chose DCF good example to determine fair value of those subsidiaries. To properly apply DCF pose WACC is a find underlying assumption. WACC composes o f follow of debt and cost of equity. For cost of equity, Juan has some obstacles to determine it using CAPM model beca employ following factors can non be reasonably precious 1. Risk-free rate is difficult to be determined because government bonds of those countries are not actually free of risk. Given that those governments had defaulted on principal and interest payments in the late(a) past. 2. fair-mindedness-risk premium cannot be reliably forecastd. Equity market of for each one untaught has short historical data e.g. historical banal prices, trading volume, dividend yield etc. This is because mass of companies are privately owned. 3. Beta cannot be appropriately calculated. There is no adversary of the subsidiary in each topical anesthetic market. Potential competitors are either doing some kind of businesses or too pocketable to be compared.For cost of debt, each local operation does not significantly retail store debt security independently in an supranational market. As a result, Juan has to use an estimate of the U.S. dollar rates as if each operation borrow from the bank.Furthermore, each country has high inflation rate which causes valuation on each local currency become slight accurate and less reliable.Cash flows are denominated in each local currency i.e. Argentina pesos,Brazil reals, and Chile pesos. However, given that there are number of drawbacks in valuation on each local currency, as discussed earlier, discount rate should also be denominated in US Dollar.Q2.In this case, why doesnt J.P. Morgan discount local cash flows at a local required rate of return? In fact, why not use that approach in general? -Firstly, J. P. Morgan is put across to value the business in U.S. dollars by the client, a Brazilian industrial conglomerate.