Help: I need every steps for this, not in excel. Assume the following informatio

Question

Help: I need every steps for this, not in excel. 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 = 5% 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 weighted average cost of capital if the capital structure consists of 55% French debt and 45% U.S. equity ?

Explanation / Answer

Expect return on equity in US =Risk free rate+(market rate -risk free rate)*beta

=0.02+((0.07-0.02)*1.2)

=8%

cost of debt in france = risk free rate+risk premium

=0.05+0.04

=9%

After tax cost of debt = (1-tax rate)*pre tax cost of debt

=(1-0.40)*0.09

= 5.40%

Weighted average cost of capital =(5.40*0.55)+(8*0.45)

=6.57%

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