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Valuation: Measuring and Managing the Value of Companies, Sixth Edition
Chapter 31 Emerging Markets
Solutions
1. Purchasing power parity (PPP) means that the goods and services will sell for the same price in
different countries, because the exchange rate will adjust to make the prices the same. PPP holds in
of subsidiaries in those markets.
2. Companies in emerging markets face risks associated with market position and industry dynamics as
they do in developing markets. Two additional risks are greater macroeconomic and political risk
3. The obvious benefit of the scenario DCF model is that the analysis provides estimates of trajectories
of future cash flows, which provide insights into what can happen, so the managers can prepare. In
4. The recommended approach is to incorporate the risks into the projections of cash flows. When
addressing political risk, for example, in the scenarios of forecasts, the managers should include a
5. The key issue is whether the volatility is diversifiable or not. Since world markets are becoming
6. If done correctly, the two methods should produce the same result, as they both incorporate a risk
adjustment. Incorporating the risk adjustment into the cash flows is a straightforward process based
7. If you chose to use the Latin American and Asian beta of 1.5, you are implicitly assuming that (a) the
sample is relatively large; (b) the firms in that sample are similar in size to the Brazilian telecom firm;
8. Since the focus is on the after-tax cash flows, the simplest course of action is to make an adjustment
by subtracting the taxes from the cash flows and then to discount them using the appropriate
discount rate. Given the fact that there may be new projects in the developing country that may
yield an attractive return compared with potential yields from investments made with after-tax
proceeds removed from the country, the managers may wish to engage in a contingency NPV based
on such possibilities. This choice would be more attractive if it is known that the taxes will be
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