Compania de Telefonos de Chile Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Foreign Market Expansion:

The Chile stock market is only worth $11.6 billion as compared to the US market which has capitalization of $2,900 billion and also has the longer trading period and hours as compared to the Chile stock market;also there are more number of transactionsin the Chile stock market. Therefore, the US stock market is the better option to raise its expansion for the advancement and enhancement of telecommunication industryin Chile. The different alternative financing decision in the foreign market are available to the company, like directly investing in the foreign market as the United States stock market is highly capitalized, or it has also the investment opportunity to invest in ETFs that is exchange traded fund and the third option which is the best option to invest is the American Depositary Receipts (ADRs).

Foreign investments have to face some barriers in the Chile market, which are the political environment and price volatility of the Chile. Chile has different inflation and interest rate as compared to the investing countries, and many other factors that would affect the foreign investmentsin the Chile. The company has raised $92 million through level III American depository receipt ADRs at the rate of $22.25 per share, and the company has also issued 10 year convertible bond internationally to raise an amount of $200 million for the expansion of the telecommunication in the Chile.

American Depository Receipts (ADRs):

The company has earned almost 186 percent in the year 1989 as compared to the income earned in 1988.If the company reduced its payout ratio of 100 percent to 60 percent than the company can save $27.96 million from their own resource, and the rest of the fund it can it from the foreign investment through ADRs. The required expansion cost of the projected period is mentioned in the exhibit 1. ADRs represent the share of the non-United States Companies traded in the stocks markets of the United States. United States investors are verycapableand effective as compared to the local investors of the Chile; therefore company has better option to raise the investment for the expansion through ADRs.

The different level of ADRs securities are available like Level I ADRs, Level II ADRs and Level III ADRs.The level I ADRs are not traded in the stock exchanges of the United States, they are held privately or traded in over the Counter markets. The level I ADRs companies does not have to comply with the rules and regulation of regulatory authorities of the United States that is generally accepted accounting principles (GAAP) and the security and exchange commission (SEC). The nonresident companies of United States registered in ADRs can avail all the benefits of the United States that are available to resident companies of the United States.

Furthermore, the other ADRs are level II and level III, the companies registered with these ADRs require full requirement of the registration and accounting regulation implemented on the resident companies of the United States. ADRs of the level III requires full implementation of the reporting standards according to the US GAAP standards to enter the United States capital market.

CTC faces several problems, while complying with the ADRs level III that they have to comply with the standards of the United States, and the main reason that if any recession period occurs then all the funds listed in the ADRs will flow back to home country Chile, which is not capable to handle the investment, and the enterprise value per share of the CTC may not show the intrinsic value of the stock or may be undervalued or overvalued. Several other telecommunication companies like CTC are offered by ADRs across the world, but the political, economic scenarios and the inflation rates of these countries are differentthan the Chile, therefore ADRs might offer undervalued stock price to the CTC....................................

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