You work for a U.S. firm, and your boss has asked you to estimate the cost of ca

Question

You work for a U.S. firm, and your boss has asked you to estimate the cost of capital for countries using the euro. You know that S = $1.2303 / € and F1 = $1.1542/ €. Suppose the dollar WACC for your company is known to be 7.8% f these markets are internationally integrated, estimate the euro cost of capital for a project with free cash flows that are uncorrelated with spot exchange rates. Assume the firm pays the same tax rate no matter where the cash flows are earned The euro cost of capital is (Round to three decimal places.)

Explanation / Answer

Answer :-

Euro Cost of Capital= Dollar WACC * S/ F1

=7.8 % *1.2303 /1.1542

= 8.314 %

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