The dollar cost of debt for Coval Consulting, a U.S. research firm, is 7.5%. The

Question

The dollar cost of debt for Coval Consulting, a U.S. research firm, is 7.5%. The firm faces a tax rate of 30% on all income, no matter where it is earned. Managers in the firm need to know its yen cost of debt because they are considering launching a new bond issue in Tokyo to raise money for a new investment there. The risk-free interest rates on dollars and yen are r$ = 5% and r¥ = 1%, respectively. Coval Consulting is willing to assume that capital markets are internationally integrated and that its free cash flows are uncorrelated with the yen-dollar spot rate. What is Coval Consulting’s after-tax cost of debt in yen? (Hint: Start by finding the after-tax cost of debt in dollars and then find the yen equivalent.)

Explanation / Answer

Cross boarder cost of capital Dolar cost of debt before tax 7.50% Tax rate 30% Risk free rate fo retun of dollar 5% Risk free rate fo retun of Yen 1% Cost of debt = ( (Rf of dollar - Rf of yen ) + risk rate) * ( 1-tax) Rf dollar 5% Risk rate 7.50% By applying the formula we get ( (5% - 1%) + 7.5% ) *( 1- 30% ) 8.05% After tax cost od debt in Yen

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.