Nextel Peru for Emerging Market Cost of Capital-myassignmenthelp

Question: Discuss about theNextel Peru for Emerging Market Cost of Capital. Answer: Introduction Based on Rafael d Anconias review of Entels investment in Nextel Peru the report will be focused on evaluating if the purchase of the firm at $ 400 million is justified by the economic situation of Peru and the global factors affecting the country. NII was organised as a holding company for Nextel in 1995, from 2000 the firm directed its focus to Latin America to take advantage of the upcoming economic mobility. Its main targets were the businesses who were in main urban areas. The firms direct connect and push-to-talk services in addition to quality customer care attracted many clients. The network was originally supported by iDEN platform under Motorola (Lawson, 2010). This was the largest technology that could use non-contiguous spectrum though with several drawbacks. The NII began experiencing problems when the iDEN technology was faced out which commissioned a phase of lose making trend. Nextel Peru was like NII as in both cases the companys operations were dependant on the iDEN technology and they both suffered when the technology became obsolete and the larger firms intensified market competition. This research report is therefore designed to contemplate on the performance of Nextel and give a recommendation regarding the takeover (Sidak, 1982). Findings and Discussion Perus integration in to the global capital market convergences the market risk and price of investments in Peru to the international one. This integration will be the principle of globalising the economy of Peru. This makes the buying and selling of assets, foreign currency exchange, government bonds as well as obtaining bank loans to be carried out from any part of the globe in a brief period. it will therefore be essential for D Anconia to consider Perus integration in to the global capital market as this will mean Entel which is in Chile can easily make business transactions with Nextel located in Peru along the international capital market. This adds up to ease of doing business in Peru (Albrow, 1990). The integration of Peru to the global capital market opens the countrys economy to external competition from firms located outside the country. It also ensures the countries asset prices takes in to account the international demand. When valuing an international company with a significant revenue operating in the emerging markets you will need to evaluate the best ways of determining the countrys risk before converting them to the recommended equity risk premiums. In addition, the integration of a country in to the global market make it necessary to evaluate the variations in equity risk across various countries (Bridges, 2002). this will make it easy to compute the hurdle rates that differ from country to country and cause fair allocation of capital. Nextel Perus estimated asset beta is 0.216%. the required rate of return on the assets will be 14.42%. the long-range growth of Nextel will be same to the other industries in Chile. This is because the firms problems will be solved once it is purchased by a bigger company and therefore be able to experience positive cashflow. The cost of capital will be estimated at 17 % as it will follow the cost being experience by Perus telecommunication firms. Considering the future positive cash inflow and the lower asset beta the $ 400 million price for the Nextel will be economically fair to pay (Saggi, 2002). Conclusion and Recommendations Globalisation plays a role in the demand of a countrys product, it is therefore effective to accommodate it in evaluating the risk premium. With the assumption that all the investors are equal and possess a fixed relative risk aversion a country will have a lower risk premium if its integrated to the global market than when segmented (Babones, 2008). This is because the investors in the country can develop a lower variance portfolio through making use of portfolio of equity of other countries belonging to the global market. It is therefore evident that globalization will minimise the countrys risk premium (Clayton, 2004). Asset beta assesses the volatility of the company without considering the impact of the debts. The companys beta of 0.216 indicates that the risk attached to the firm is low and there is an estimated chance that the investor will be able to gain a positive cash in future date and as a result possible profitability (Kozlenkova, et al., 2012). The estimated required return on assets will give the profitability of the company in terms of total assets. Being that the company will be able to generate a profit of 14.25, its concluded that Nextel will be a profitable firm and the purchase should be pursued. Considering that D Anconia have evaluated and realised that the challenges facing Nextel are temporary and will be solved by selling the firm to a larger firm which can purchase the required technology the management of the firm should consider the sale other than see the firm making losses continuously thereby losing the investors capital. Upon purchase the firm will grow at the industry rates of Peru. Since the economy of Peru is on the rise as suggested by the estimated long-range growth rate of 14.2 %, there is projection that the firm will be a profitable venture (Beladi, et al., 2013). The payment of $ 400 million for the firm by Entel is therefore an economically favourable decision. Calculations The expected growth will be in line with the Peru long range growth rate hence 14.2% Return on equity Return on assets References Albrow, M. a. E. K., 1990. Globalization, Knowledge and Society , London: Sage. Babones, S., 2008. Studying Globalization: Methodological Issues, s.l.: John Wiley Sons. Beladi, H., Chao, C.-C. Hollas, D., 2013. Does globalization weaken labor unions in developing countries?. The Journal of International Trade Economic Development, 22(4), p. 56271. Bridges, G., 2002. Grounding Globalization: The Prospects and Perils of Linking Economic Processes of Globalization to Environmental Outcomes. Economic Geography, 78(3), p. 36186. Clayton, T., 2004. 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