Question

3) Mercadolibre is an Argentinian based online shopping platform partially owned by Amazon. The company has had moderate success growing their topline at a steady rate of 30% while maintaining 18.5% net margins that they expect to maintain for the next three years. In year 4, residual income is expected to grow at 7.2% indefinitely. In FY 2018 they generated ARP 25,458,900,000 in revenue while their balance sheet showed that they had ARP 96,236,000,000 in assets while also having ARP 53,987,120,000 in liabilities. The company maintains a dividend policy of 4.2%. The required return on equity is 13.65%. (5 pts for each subsections)

A) What is the initial Book Value of Mercadolibre?

B) What is the residual income in 2019?

C) What is the value of the company in 2018? '

D) What would be a problem with using the residual income model for Mercadolibre?

Answer 1

a) Book value of Mercadolibre = Assets-Liabilities = 96,236,000,000 - 53,987,120,000 = 42,248,880,000

b) Revenues of 2019 = 25,458,900,000*1.3 = 33,096,570,000

Net income = 33,096,570,000*0.185 = 6,122,865,450

Residual income(RI 1) is defined as net income generated in excess of minimum rate of return

=6,122,865,450- 42,248,880,000*0.1365 = 355,893,330

C)

Initial Book Capital	Revenue	Net Income	Dividend	Closing Book Capital	Residual Income
42248880000	33096570000	6122865450	257160349	48114585101	355893330
48114585101	43025541000	7959725085	334308454	55740001733	1392084219
55740001733	55933203300	10347642611	434600990	65653043353	2739132374

Value of Company = BV equity + 355,893,330/1.1365 + 1,392,084,219/(1.1365)^2 + 2,739,132,374(1.1365)^3 + 2,739,132,374*1.072/(0.1365-0.072) = 91,030,574,806

d) There is no problem with using residual income is this case as residual income was positive in all years. In case value of residual income is negative before stable growth, the value of firm as per residual income model will be negative