Answer Happy

You have been asked to review the valuation of Santiago Cement,
a small Peruvian cement company, by an M&A analyst, for
acquisition by a US cement company. The analyst has estimated a
value of 1 billion Peruvian Sol for the equity, based upon the
expectation that the firm will generate 50 million Peruvian sol in
cash flows (to equity) next year, growing at 5% (in sol) a year
forever; mistakenly, he used the US company’s dollar cost of equity
in the valuation. To correct the valuation, you have been provided
with the following information: ! The US treasury bond rate is 3%
and Peruvian dollar denominated bond rate is 5%; Peruvian equities
are 1.5 times more volatile than the Peruvian dollar bond. ! The
expected inflation rate in Peruvian sol is 6% and the expected
inflation rate in US dollars is 2%. ! The typical Peruvian company
generates 80% of its revenues in Peru, but Santiago Cement
generates all of its revenues in Peru. Estimate the correct value
of equity in Santiago Cement. (please show how the 10% cost of
equity is calculated)