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 = Total Assets - Intangible Assets (Patents,Goodwill ) - Total Liabilities

Therefore, Initial Book Value = 96236000000 - 53987120000 = ARP 42248880000

B) Residual Income = Net Book Value - Revenue Generated

= 42248880000 - 25458900000

=ARP 16789980000

C) Value of Co.= D1\Ke -g

= 16789980000 *4.2%\ 13.65% - 7.2%

= ARP 10933010232.50

D) Residual Income Model will not give full value of company . It provides only Residual value. It does not measure the actual growth in the value of company.