Assume the following information for Pexi Co., a U.S.-based MNC that is consider

ID: 2766502 • Letter: A

Question

Assume the following information for Pexi Co., a U.S.-based MNC that is considering obtaining funding for a project in Germany: SHOW ALL WORK

U.S. risk-free rate = 4%

German risk-free rate = 5%

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

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

Beta of project = 1.2

Expected U.S. market return = 10%

U.S. corporate tax rate = 30%

German corporate tax rate = 40%

What is Pexi’s cost of dollar-denominated equity? A) 12.0%. B) 11.2%. C) 10.0%. D) 7.2%.

What is Pexi’s cost of dollar-denominated debt?

7.0%.

8.0%.

6.3%.

4.9%.

1.Cost of dollar-denominated equity = Rf + beta*( Rm - Rf) where Rf = 4%, Rm = 10% and beta = 1.2

Hence cost of equity (dollar-denominated) = 4 + 1.2*(10-4) = 11.2%

2. The dollar denominated debt cost = 4 + 3 = 7%

The afte tax cost of debt = 7*(1-0.3) = 4.9%

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