14.27 thanks. Shapiro\'s Multinational Financial Management, 9th Edition Test Ba

Question

14.27 thanks.

Shapiro's Multinational Financial Management, 9th Edition Test Bank Section: The cost of equity capital Level: Difficult 14.27 Suppose the euro is expected to depreciate against the dollar by 2% annually and the 10- year franc interest rate is 11%. What is the after-tax expected dollar cost of issuing a 10-year franc bond if the French corporate tax rate is 40%? a) 5.93% b) 7.61% c) 4.47% d) 6.60% Ans: c Section: The cost of equity capital Level: Difficult 14.28 Capital structures of foreign affiliates should a) conform to the standards set by local companies y in order to take advantage of opportunities to reduce overall risk and financing costs c) be very similar to the parent's capital structure because this is what determines the firm's risk profile d) conform to the standards established by other foreign units Ans: b Torein subsidiary capital structure

Explanation / Answer

14.27 Answer = C) 4.47%

Franc interest rate (r)= 11%

Euro is expected to depreciate against the dollar (c) = 2%

Corporate tax rate (t) = 40%

After tax expected Cost = r(1+c)(1-t) + c

= 0.11 * (1 -0.02) * (1- 0.04) + (-0.02)

= 0.04468 or

4.47%

ANSWER = c) 4.47%

14.28 Capital structures of foreign affiliates should

ANSWER =b) vary in order to take advantage of opportunities to reduce overall risk and financing costs

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