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

Juan Lopez, a new associate in J.P. Morgans Latin America M&A department, was assigned the task of valuing the telephone directory subroutine subsidiary of a large Brazilian industrial conglome sum up. The subsidiary is Paginas Am arlas, which ope runs in three Latin countries such as genus Argentina, Brazil, and Chile. All cash flows retain been converted to U.S. dollars, and present surveys computed for various bank discount swans. In edict to the present value properly, he should determine the appropriate target rate of returns for dollar flows originating in Argentina, Brazil, and Chile.Q1.What is the valuation problem here? In what coin are the cash flows denominated? In what currency should the discount rate denominated? Be sure you understand Exhibits 1, 2, 3, and 4 of the case. Juan chose DCF model to determine fair value of those subsidiaries. To properly apply DCF model WACC is a key underlying assumption. WACC composes of cost of debt and cost of equity. For cost o f equity, Juan has some obstacles to determine it using CAPM model beca do pursual factors cannot be reasonably valued 1. Risk-free rate is difficult to be determined because government bonds of those countries are not actually free of risk. given over that those governments had defaulted on principal and interest payments in the recent past. 2. Equity-risk premium cannot be reliably estimated. Equity market of each country has inadequate diachronic data e.g. historical stock prices, trading volume, dividend yield etc. This is because bulk of companies are privately owned. 3. Beta cannot be appropriately calculated. There is no competitor of the subsidiary in each local market. Potential competitors are either doing many kind of businesses or too small to be compared.For cost of debt, each local operation does not significantly thin debt security independently in an international market. As a result, Juan has to use an estimate of the U.S. dollar rates as if each operation usur p from the bank.Furthermore, each country has high inflation rate which causes valuation on each local currency become less(prenominal) 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 requested to value the business in U.S. dollars by the client, a Brazilian industrial conglomerate.