Petro

____________________________________________________________

_______________________________

Fuqua School of Business

Emerging Markets Corporate Finance BA456

Irina Antsiferova, Canan Aydemir, Oscar Farfan, Nijat Valiyev

Spring 2005

____________________________________________________________

_________________

The Bolivian Tropical Wood Consortium (TWC)

Case Solution

The following case solution will evaluate TWC’s wood processing project using the International Cost of Equity Capital Calculation model (ICECC). The results will be then compared with the appraisal made by TWC and other different scenarios.

Our valuation suggests that the country risk premium poses a real burden to the project’s cost of capital. We found however well-founded risk mitigating factors - including real options – that make the project viable.

1. Project Finance Overview

Following consultations and negotiations with several international finance agencies, as well as potential partners, TWC has estimated a 35/65 debt-equity financial structure. The different sources and the estimated cost of debt are shown below.

Exhibit 1: TWC Financial Structure

2. Cost of Capital Computation

Exhibit 2 summarizes the ICECC worksheet used to compute the project’s cost of capital. In computing the country risk premium, the Sep/04 Bolivian Institutional Investor Country Credit Rating has been lowered by 3 points in order to account for the escalating social conflicts in the first quarter of 2005. The scores and weights corresponding to the risks specific to the project have been assigned on the basis of different assumptions regarding mitigating/attenuating factors (a detailed description is provided in Appendix 1). After considering the impact of all different risk categories, the ICECC arrives at a cost of capital of 18.12%, which is significantly lower than the country’s risk premium. Among the most important mitigating factors are the project’s...