Help, I need the steps to this questions. 1. Assume the following information fo

Question

Help, I need the steps to this questions.

1. Assume the following information for a U.S.­based MNC that is considering obtaining funding for a project in France: U.S. risk­free rate = 2% France risk­free rate = 5% Risk premium on dollar­denominated debt provided by U.S. creditors = 3% Risk premium on euro­denominated 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 euro­denominated debt for this firm?

2. Assume the following information for a U.S.­based MNC that is considering obtaining funding for a project in France: U.S. risk­free rate = 2% France risk­free rate = 5% Risk premium on dollar­denominated debt provided by U.S. creditors = 3% Risk premium on euro­denominated 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 weighted average cost of capital if the capital structure consists of 55% French debt and 45% U.S. equity ?

3. Assume the following information for a U.S.­based MNC that is considering obtaining funding for a project in France: U.S. risk­free rate = 2% France risk­free rate = 4.75% Risk premium on dollar­denominated debt provided by U.S. creditors = 3% Risk premium on euro­denominated 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 euro­denominated equity for this firm?

Explanation / Answer

1) cost of euro­denominated debt for this firm

=(France risk­free rate + Risk premium on euro­denominated debt provided by French creditors )*(1- French corporate tax rate)

=(5%+4%)*(1- 0.40)

=9%*0.60

=5.4%

2) cost of US equity=2%+1.2*(7%-2%)=8%

cost of French debt=5.4%

cost of capital if the capital structure consists of 55% French debt and 45% U.S. equity

=0.55*5.4%+0.45*8%

=6.57%

3)cost of euro­denominated equity for this firm=4.75%+2.5*(9%-4.75%)=15.38%

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