Massmart

Q3. In valuing the deal, you should begin with a DCF model to estimate the ‘standard alone’ value of Massmart. In the baseline model you should find an appropriate discount rate (hint: using the Goldman model is acceptable for this case since South Africa does issue US$ denominated sovereign bonds) that incorporates country and business risks to discount free cash flows and estimate the value of Massmart’s equity (per share price) in South African Rand (ZAR). You should perform sensitivity analyses on a number of key inputs.

Looking at Massmart’s stand-alone value, which is present value of R 21,199 million, acquisition of Massmart is quite appealing even though the discount rate was increased to 14.6% after incorporating country and business risks to discount free cash flows using Goldman-Integrated modeling. However project managers should consider all the issues affecting the investment on the acquisition of Massmart such as freezing job cuts for the next two years, honoring union agreement to secure newly created jobs. Although these certain conditions restrict the investment decision, reducing unemployment rate of 25.7% will hugely benefit the South African economy. In other words, more employment would generate more spending and thus the GDP of South Africa will be increased immensely. Furthermore, Walmart’s investment on buildings and infrastructures will help fixed capital formation in South Africa.

Q4. What valuation adjustments do you need to make if Walmart wants to evaluate the project cash flows (and equity price) in US$ (perhaps because they want to repatriate the cash flows back to the US)? Hint: Use at least one model to do the currency adjustment (e.g., forward rates and PPP). You can earn extra credits if you use multiple models and compare the results from different models and evaluate these models.

If Walmart wants to evaluate the project cash flows in US$, project managers should find the way to hedge the currency risk to an extent that...