# Paginas Amarelas Case Study

7428 Words May 17th, 2006 30 Pages

1 Introduction 2

2 Determining the Medium and Long Term Growth Rates 4

2.1 Growth in the Telephone Directory Industry 5

2.1.1 Competition 6

2.1.2 Demand for Telephone Lines 9

2.1.3 A Short Summary of the Growth Prospects in the Region 10

2.2 Estimation of the Growth Rates for Argentina 11

2.3 Estimation of the Growth Rates for Brazil 12

2.4 Estimation of the Growth Rates for Chile 13

3 Calculating the Cost of Capital 13

3.1 The Godfrey and Espinosa (1996) Model 14

3.1.1 Determining the Risk Free Rate 15

3.1.3 Determining the Market Risk Premium 17

3.1.4 Determining the Credit Spread 17

3.1.5 Calculating the Cost of Capital 18

3.1.6 Criticisms of the Godfrey and Espinosa (1996)
The WACC, or more specifically the cost of capital, will take into account the risks of investing in the particular country (the systematic risks).

2 Determining the Medium and Long Term Growth Rates

The long term perpetual growth rate needs to take into account the unsystematic factors that will affect Paginas Amarelas. Note that the systematic factors that will affect the value of Paginas Amarelas will be taken into account in the cost of capital, and thus the discount rate, and to include these systematic factors in the growth rate would result in double counting, and thus a lower value for Paginas Amarelas will be calculated than what should otherwise be the case.

Juan Lopez calculated the free cash flows (FCF) for Paginas Amarelas for the next eight years, and took into account many factors that would affect the telephone directory industry in the relevant countries. As a starting point, we determine the growth rate of FCFs in US Dollars for each country.

Growth Rates of FCF in US Dollars

1998 1999 2000 2001 2002 2003 2004 Average

Argentina 0.0270 0.0301 0.0390 0.0490 0.0591 0.0418 0.0400 0.0409

Brazil 0.0270 0.0300 0.0390 0.0491 0.0590 0.0419 0.0399 0.0409

Chile 0.0270 0.0300 0.0390 0.0491 0.0589 0.0419 0.0402 0.0409

The estimation of FCFs in US Dollars in Exhibit 1 assumes interest rate parity holds, and thus the growth rate of FCFs in local currency less