3) Mercadolibre is an Argentin

3) Mercadolibre is an Argentinian based online shopping platformpartially owned by Amazon. The company has had moderate successgrowing their topline at a steady rate of 30% while maintaining18.5% net margins that they expect to maintain for the next threeyears. In year 4, residual income is expected to grow at 7.2%indefinitely. In FY 2018 they generated ARP 25,458,900,000 inrevenue while their balance sheet showed that they had ARP96,236,000,000 in assets while also having ARP 53,987,120,000 inliabilities. The company maintains a dividend policy of 4.2%. Therequired return on equity is 13.65%. (5 pts for eachsubsections)

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 modelfor Mercadolibre?


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 inexcess of minimum rate of return

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


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 caseas residual income was positive in all years. In case value ofresidual income is negative before stable growth, the value of firmas per residual income model will be negative

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