A U.S multinational corporation is considering a new project in Poland.
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A U.S multinational corporation is considering a new project in Poland, which requires an initial investment of 700 million zloty. The project is expected to have profits of 400 million zloty in the first year of operations and 600 million zloty in the second year of operations. The current exchange rate is $0.35/zloty. The risk-free interest rate in the United States is 4 percent and the risk-free interest rate in Poland is 11 percent. The multinational thinks that the required rate of return on the market portfolio in the United States is 10 percent, and estimates that project beta is about 0.90. There is no information on the required rate of return in Poland.
a. What is the all-equity cost of capital you are able to calculate for this project? Does this require you to evaluate the project using the centralized or decentralized technique?
b. What is the present value of the project?
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Ks = Krf + B ( Km - Krf)
· Ks = The Required Rate of Return, (or just the rate of return).
· Krf = The Risk Free Rate
· B = Beta
· Km = The expected return on the overall stock market.
a. In case of USA:
Ks = 4 + 0.90( 10 - 4)
Therefore Ks = 9.4.
In case of Poland
Ks = 11 + 0.90 ( Km - 11)
So, one can see that you am required to evaluate the project using the centralized technique because apart from the fact that there is no ...
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