Answer Happy

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 14 million Honduran lempiras (Lp) next year, 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 Lp15.4583/$, but the Honduran inflation rate is expected to remain at a relatively high rate of 18.0% per annum compared to the U.S. dollar inflation rate of only 4.5% per annum. Slinger Wayne expects to earn at least a 22.5% annual rate of return on international investments like Carambola. a. What is Carambola worth if the Honduran lempira were to remain fixed over the three-year investment period? b. What is Carambola worth if the Honduran lempira were to change in value over time according to purchasing power parity? a. Calculate the free cash flows in Honduran lempiras (Lp) below: (Round to the nearest whole number.) Year 2 Year 1 14,000,000 Lp Carambola's expected free cash flow Expected sale value in year 3 Total expected cash flow Expected exchange rate (Lp/$) Carambola's expected cash flow in US$ Year 0 15.4583 Lp Lp Lp Lp Lp Year 3 C