FINANCE HW.Wk 10 CH 16 Assessing L-T Debt and Equity Capital Structure, 19 Inter

Question

FINANCE HW.Wk 10 CH 16 Assessing L-T Debt and Equity Capital Structure, 19 International Finance Question 8 (of 10 8. 3.00 points A financial manager has determined that the appropriate discount rate for a foreign project is 11 percent However, that discount rate applies in the United States using dollars What discount rate should be used in the foreign country using the foreign currency? The inflation rate in the United States and in the foreign country is expected to be 6 percent and 12 percent, respectively References eBook & Resources Worksheet Difficulity 1 Basic O Type here to search OFF MC MR M- M+ CE 456-÷

Explanation / Answer

Nominal discount rate in USD = inflation + Real discount rate

Which implies, real discount rate to be used is 11%-6% = 5%

Now since real discount rate is 5% and we need to discount it on the cash flows that are in foreign currency,

Nominal discount rate to be used = real discount rate + Inflation of foreign currency

= 5% + 12% = 17%

Thus, discount rate of 17% is to be used in the foreign currency.

Related Questions

Navigate

• Browse (All)
• Browse F
• Subjects

---

---

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