1. Assume the following information for a U.S.-based MNC that is considering obt

Question

1. 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=2.25
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 cost of dollar-denominated equity for this firm?
Answer
A. 7.6%
B. 4.9%
C. 8%
D. 3.5%




2. 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 = 1.25
Beta of the project with respect to the French stock market=2.25
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 cost of dollar-denominated equity for this firm?
Answer
A. 7.62%
B. 8.25%
C. 4.91%
D. 8%

Explanation / Answer

France cost of equity= 5+[2.5x4]= 15% after tax cost of us debt= 7(1-.30)= 4.9% weighted average cost of capital consists of 55% French equity and 45% U.S. deb =.55x15+(.45x4.9)= 10.455%

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