Assume the following information for a U.S.-based MNC that is considering obtain

ID: 2718785 • Letter: A

Question

Assume the following information for a U.S.-based MNC that is considering obtaining funding for a project in France:

U.S. risk-free rate = 2%

France risk-free rate = 4.75%

Risk premium on dollar-denominated debt provided by U.S. creditors = 3%

Risk premium on euro-denominated debt provided by French creditors = 4%

Beta of the project with respect to the U.S. stock market = 1.2

Beta of the project with respect to the French stock market=2.5

Expected U.S. stock market return = 7%

Expected French stock market return=9%

U.S. corporate tax rate = 30%

French corporate tax rate = 40%

What is the cost of euro-denominated equity for this firm?

15%

17.6%

15.38%

cost of euro-denominated equity = risk free rate + beta (market return - risk free rate)

= 4.75 + 2.5(9-4.75)

= 15.38%.

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