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 10 million Honduran lempiras (Lp) next year (2022), 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 Lp24.89 = $1.00, but the Honduran inflation rate is expected to remain at a relatively high rate of 14.5% per annum compared to the U.S. dollar inflation rate of only 3.5% per annum. Slinger Wayne expects to earn at least a 22.5% annual rate of return on international investments like Carambola. a. What is Carambola worth if the Honduran lempira were to remain fixed over the three-year investment period? b. What is Carambola worth if the Honduran lempira were to change in value over time according to purchasing power parity? a. What is Carambola worth if the Honduran lempira were to remain fixed over the three-year investment period? Calculate the free cash flows in Honduran lempiras (Lp) below: (Round to the nearest whole number.) Carambola's expected free cash flow Expected sale value in year 3 Total expected cash flow Expected exchange rate (Lp/$) Carambola's expected cash flow in US$ Year 0 24.8900 Year 1 Year 2 Year 3 Lp 10,000,000 Lp 267,818,000 Lp 287,941,000 Lp 287,941,000 Lp 248,900,000 Lp 267,818,000 Lp 287,941,000
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 10 million Honduran lempiras (Lp) next year (2022), 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 Lp24.89 = $1.00, but the Honduran inflation rate is expected to remain at a relatively high rate of 14.5% per annum compared to the U.S. dollar inflation rate of only 3.5% per annum. Slinger Wayne expects to earn at least a 22.5% annual rate of return on international investments like Carambola. a. What is Carambola worth if the Honduran lempira were to remain fixed over the three-year investment period? b. What is Carambola worth if the Honduran lempira were to change in value over time according to purchasing power parity? a. What is Carambola worth if the Honduran lempira were to remain fixed over the three-year investment period? Calculate the free cash flows in Honduran lempiras (Lp) below: (Round to the nearest whole number.) Carambola's expected free cash flow Expected sale value in year 3 Total expected cash flow Expected exchange rate (Lp/$) Carambola's expected cash flow in US$ Year 0 24.8900 Year 1 Year 2 Year 3 Lp 10,000,000 Lp 267,818,000 Lp 287,941,000 Lp 287,941,000 Lp 248,900,000 Lp 267,818,000 Lp 287,941,000
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 22P
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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 10 million Honduran lempiras (Lp) next year (2022), 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 Lp24.89 = $1.00, but the Honduran inflation rate is expected to remain at a relatively high rate of 14.5% per annum compared to
the U.S. dollar inflation rate of only 3.5% per annum. Slinger Wayne expects to earn at least a 22.5% annual rate of return on international investments like Carambola.
a. What is Carambola worth if the Honduran lempira were to remain fixed over the three-year investment period?
b. What is Carambola worth if the Honduran lempira were to change in value over time according to purchasing power parity?
a. What is Carambola worth if the Honduran lempira were to remain fixed over the three-year investment period?
Calculate the free cash flows in Honduran lempiras (Lp) below: (Round to the nearest whole number.)
Carambola's expected free cash flow
Expected sale value in year 3
Total expected cash flow
Expected exchange rate (Lp/$)
Carambola's expected cash flow in US$
Year 0
24.8900
Year 1
Year 2
Year 3
Lp 10,000,000 Lp 267,818,000 Lp 287,941,000
Lp 287,941,000
Lp 248,900,000 Lp 267,818,000 Lp 287,941,000
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