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 = $1.2107/€ and F1 = $1.1507/€. Suppose the dollar WACC for your company is known to be 8.5%. If 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.

A: The Euro cost of capital is __%

Explanation / Answer

Euro cost of capital = Dollar WACC * S/F1

Euro cost of capital = 8.5%*1.2107/1.1507

Euro cost of capital = 8.94%

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