You are analyzing an expansion opp for Brahma, the Brazilian beverage firm, in B

Question

You are analyzing an expansion opp for Brahma, the Brazilian beverage firm, in Brazil. The firm estimates that it will have to invest 1 billion Brazilian real today and that it will generate $150 million in real Brazilian real every year in perpetuity. The firm has a nominal cost of equity of 22% (In Brazilian real) a nominal cost of debt 12% (in brazilian real) a tax rate of 33%, and a debt ratio of 20%. if the expected inflation rate is 8% in brazil, estimate the net presente value of this project.

Explanation / Answer

Debt ratio = 20%

Weight of debt in capital structure = 20%

Weight of equity in capital structure = 80%

Cost of debt = 12%

Cost of equity = 22%

Tax rate = 33%

Now calculate WACC for company is calculated below:

WACC = 80% × 22% + 20% ×12% × (1 – 33%)

             = 17.6% + 1.6%

             = 19.20%

WACC of company is 19.20%.

Inflation rate = 8%

Real interest rate = WACC – Inflation rate

                            = 19.20% - 8%

                            = 11.20%

Real interest rate is 11.20%.

Value of investment = 1 billion Real

Annual Cash inflow = 150 million real

Real net Present value = (150 million / 11.20%) – 1,000 million

                                    = 1,339.29 million - 1,000 million

                                    = 339.29 million

Real net present value is 339.29 million.

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