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Solved INSEAD Case Study Solution: PRINCE S.A.: Valuation of a Cross-Border Joint Venture (Download Now)

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Solution Pages: 4

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Word (.docx) & Excel (.xlsx)

Questions Covered in the Solution

Question 1:

a) What are major risks faced by Jersey entering the Tunisian market? Please use the same approach we used in class for Petrozuata and identify what are the sources of risk of the venture from the perspective of Jersey (recall, operating risk, sovereign risk, institutional risk, force majeure risk, global risk).

b) What would you do to reduce them?

c) Does the link with Nakit help in any way on this front?

Question 2: If we focus on the currency risk (only) for Jersey. Can you describe the types of exposures (translation, transaction, economic) that Jersey faces.

Question 3: How would you hedge these exposure?

Question 4: At which price is Nakit willing to sell? That is what is Nakit’s valuation of half of Prince?

Question 5: At which price is Jersey willing to buy? That is what is Jersey’s valuation of half of Prince?

Question 6: What makes the valuation of Prince’s venture different from the valuation of an identical project in a domestic setting

Question 7: Nakit’s historical cost of equity is 25% (you can assume it to be the unlevered one). Would you use it to evaluate the deal? Is it too high/low?

Sample of Solution

Question 1:  a) What are major risks faced by Jersey entering the Tunisian market? Please use the same approach we used in class for Petrozuata and identify what are the sources of risk of the venture from the perspective of Jersey (recall, operating risk, sovereign risk, institutional risk, force majeure risk, global risk)

Entering Tunisian would certainly expose Jersey to significant risks which can range from being firm-specific and operational to Market-specific and bureaucratic involving local governments of Tunisian. Essentially with the partnership with Tunisian based textile manufacturing Prince S.A, the firm would have to deal with new risks which can also potentially impact the operational efficiency of the firm. Sources of these risks would not only be limited to the existence of Prince but would also involve conjunction of competitors, local regulations and other market forces. With the increasing competition within Tunisian, for textile exports and increased partnership with international textile players, having a competitive workforce can become difficult, which can increase costs of production for Prince and eventually for Jersey. Moreover, any changes in the local regulations on workforce or local authorities’ attitude towards foreign direct investment can also impact the profitability of Jersey.

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Question 2: If we focus on the currency risk (only) for Jersey. Can you describe the types of exposures (translation, transaction, economic) that Jersey faces?

Considering just the currency risk, it can be realized that Jersey would have to integrate accounts receivable and accounts payable cycles exposed to Tunisian dinar. For instance, while making credit and debit transactions, Jersey would need to ensure that the credit transactions are synchronized with the debits. Whereas, the translation should also be market competitive. Otherwise, Jersey would have to incur additional costs which can wear out profit margins. Furthermore, any economic policy change by Tunisian Federal Bank can also increase the cost of operations through higher interest rates. Whereas, inflation can also adversely impact the production cost through increased wages

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Question 7: Nakit’s historical cost of equity is 25% (you can assume it to be the unlevered one). Would you use it to evaluate the deal? Is it too high/low?

Although original cost of Equity for Jersey is lower than 25%, however, since the risks would become more complex due to the implications of international transactions and global risks, 25% cost of equity is considered as lower for this deal. Furthermore, to incorporate the increase in debt for the Prince Venture along with the assumption of country-specific risks, the cost of capital should be higher than the one that has been used to evaluate the efficiency of operation up till now. Since, most of the Prince’s venture with Jersey is to be capitalized by debt through local financiers, Jersey’s equity investment would require a greater return to satisfy the risks assumed by the net amount of equity invested. So effectively, considering the perspective of Jersey, higher cost of equity is required to evaluate the deal to incorporate the increased risks as compared to current operational risks of Prince.

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