Question-3: Arundel Partners are contemplating an investment in Argentina. They gather data to determine the appropriate...

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Question-3: Arundel Partners are contemplating an investment inArgentina. They gather data to determine the appropriate return totheir equity investors. Their data suggest that Argentine equitymarket is 2.5 times more volatile than the US equity market; theyestimate the project beta as 1.5, and the project has 100% exposureto Argentina country risk. Arundel partners assume that USrisk-free rate is 3% and US EMRP is 5.5%. Given the volatility ofthe Peso and difficulty of hedging peso cash flows, Arundelpartners think that a 3% additional currency risk premium (ie.Measure of Currency Risk x Unit Price of Currency Risk) iswarranted on top of the Country Risk Premium. A. What is theEstimate CRP for Argentina based in relative equity marketvolatility? B. What should be the required rate of return Arundelshareholders expect in USD terms assuming 100% country riskexposure. C. What should be the required rate of return if thecountry risk were scaled the same as the market risk of the asset?D. If the Argentine credit default risk premium is 400 bp andequity market volatility to bond market volatility ratio is 1.4,what should be the Argentina Country Risk Premium?
Hint: Review the Nextel Peru case

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4.3 Ratings (692 Votes)

US Equity market risk premium EMRP 55 As Argentina equity market is 25 times volatile than US and Currency risk for Peso 3 A hence Argentina country risk premium EMRP See Answer

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Question-3: Arundel Partners are contemplating an investment inArgentina. They gather data to determine the appropriate return totheir equity investors. Their data suggest that Argentine equitymarket is 2.5 times more volatile than the US equity market; theyestimate the project beta as 1.5, and the project has 100% exposureto Argentina country risk. Arundel partners assume that USrisk-free rate is 3% and US EMRP is 5.5%. Given the volatility ofthe Peso and difficulty of hedging peso cash flows, Arundelpartners think that a 3% additional currency risk premium (ie.Measure of Currency Risk x Unit Price of Currency Risk) iswarranted on top of the Country Risk Premium. A. What is theEstimate CRP for Argentina based in relative equity marketvolatility? B. What should be the required rate of return Arundelshareholders expect in USD terms assuming 100% country riskexposure. C. What should be the required rate of return if thecountry risk were scaled the same as the market risk of the asset?D. If the Argentine credit default risk premium is 400 bp andequity market volatility to bond market volatility ratio is 1.4,what should be the Argentina Country Risk Premium?Hint: Review the Nextel Peru case