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Prince S.A.: valuation of a cross border joint-venture

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Prince S.A.: valuation of a cross border joint-venture
Questions:
1. Are the financial statements in Exhibit 3.7 consistent with V. Dourtan assumptions in Exhibit 3.1?
2. What’s is the most relevant valuation model, APV or Present Value?
3. How are multi-currency cash flows, currency risk and political risk being taken into account in our valuation model?
4. What is the relevant cost of capital for Jersey? For R.T. Nakit? Can they be different? Why?
5. What is the Dinar (Pound) value of the joint venture R.T. Nakit (jersey)? What are the project’s value drivers?
1- The data presented on exhibit 3.7 is, indeed following some of the assumptions stated on exhibit 3.1: minimum cash level is 10% of total assets, which was proved by dividing cash by total assets, obtaining values between 0.998 and 1. Also, dividends would be adjusted in order to debt-to-equity would equal to 1, which also happens in all periods. Exhibit 3.2 follows some other assumptions: the fabric plant will be upgraded to meet quality requirements, and the upgrade will have costs in the years between 1985 and 1987, including. Furthermore, the costs relative to three new garment plants are also included in this exhibit. There is a strong possibility that these two assumptions may be represented in the behaviour of fixed assets on exhibit 3.7, but since these assets are not discriminated it can’t be certain if exhibit 3.7 is following both assumptions, or just one.
Exhibit 3.7 does not correspond to the assumption made relatively to constant depreciation, and administrative and selling costs. In exhibit 3.7 these costs grew, on average, 7.25% per year. Calculations are stated in Appendix 1.
2- The Discounted Cash Flow (DCF) and the Adjusted Present Value (APV) are the two models that can be used to valuate this project. Under DCF, the stream of the unlevered free cash flows generated by the project are discounted using WACC, which includes the effects of financing as well as other different sources of risk (such as equity).

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