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What is carambola worth if honduran lempira were to change

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Reference no: EM132899738

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 10 million Honduran lempiras? (Lp) next? year, and that this free cash flow will continue to grow at a constant rate of 8.5% 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 Lp15.3948?/$, but the Honduran inflation rate is expected to remain at a relatively high rate of 15.5?% per annum compared to the U.S. dollar inflation rate of only 3.5?% per annum. Slinger Wayne expects to earn at least a 23.5% annual rate of return on international investments like Carambola.

Question a. What is Carambola worth if the Honduran lempira were to remain fixed over the? three-year investment? period?

Question b. What is Carambola worth if the Honduran lempira were to change in value over time according to purchasing power? parity?

Reference no: EM132899738

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